As filed with the Securities and Exchange Commission on November 5, 2012

Registration No. 333-________

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM S-1

REGISTRATION STATEMENT

UNDER

THE SECURITIES ACT OF 1933

TENGION, INC.

(Exact name of Registrant as specified in its charter)

Delaware

2836

20-0214813

(State or other jurisdiction of

incorporation or organization)

(Primary Standard Industrial

Classification Code Number)

(I.R.S. Employer

Identification Number)

3929 Westpoint Boulevard, Suite G

Winston-Salem, NC 27103

(336)722-5855

(Address, including zip code, and telephone number, including area code, of Registrant’s principal executive offices)

A. Brian Davis

Chief Financial Officer

Tengion, Inc.

3929 Westpoint Boulevard, Suite G

Winston-Salem, NC 27103

(336)722-5855

Copy to:

Joseph W. La Barge, Esq.

Ballard Spahr LLP

1735 Market Street

51st floor

Philadelphia, PA 19103

(215) 665-8500

Approximate date of commencement of proposed sale to the public: As soon as practicable after the effective date of this registration statement.

If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box. x

If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. o

If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. o

If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. o

Large accelerated filero

Accelerated filero

Non-accelerated filero (Do not check if a smaller reporting company)

Smaller reporting companyx

The registrant hereby amends this registration statement on such date or dates as may be necessary to delay its effective date until the registrant shall file a further amendment which specifically states that this registration statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until the registration statement shall become effective on such date as the Commission, acting pursuant to such Section 8(a), may determine.

CALCULATION OF REGISTRATION FEE

Title of Each Class of Securities to be

Registered

Amount to be

Registered(4)

Proposed

Maximum

Offering

Price Per

Share(5)

Proposed

Maximum

Aggregate

Offering Price

Amount of

Registration

Fee

Common Stock, par value $0.001 per share (1)

20,007,002

$

1.00

$

20,007,002

$

2,729

Common Stock, par value $0.001 per share (2)

52,843,337

$

1.00

$

52,843,337

$

7,207

Common Stock, par value $0.001 per share (3)

36,425,169

$

1.00

$

36,425,169

$

4,969

Total

109,275,508

$

109,275,508

$

14,905

(1)

Represents shares of common stock issuable upon the conversion of Senior Secured Convertible Notes issued to the selling stockholders on October 2, 2012 (the “Convertible Notes”).

(2)

Represents shares of common stock issuable upon the exercise of warrants issued to the selling stockholders on October 2, 2012 (the “2012 Warrants”).

(3)

Represents shares of common stock that may be issuable upon certain adjustments to the number of shares issuable upon the exercise of the 2012 Warrants or the conversion of the Convertible Notes.

(4)

Pursuant to Rule 416 promulgated under the Securities Act of 1933, as amended (the “Securities Act”) the shares of common stock offered hereby also include an indeterminate number of additional shares of common stock as may become issuable upon the exercise of the 2012 Warrants, conversion of the Convertible Notes or otherwise pursuant to the 2012 Warrants or the Convertible Notes to prevent dilution resulting from stock splits, stock dividends, stock issuances or similar transactions.

(5)

Estimated solely for purposes of calculating the registration fee pursuant to Rule 457(c) under the Securities Act using the average of the bid and asked prices of our common stock as reported by the OTCQB on November 2, 2012, which was $1.00.

The registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the registrant shall file a further amendment which specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until the Registration Statement shall become effective on such date as the Commission, acting pursuant to said Section 8(a), may determine.

The information in this preliminary prospectus is not complete and may be changed. The selling stockholders may not sell these securities until the registration statement filed with the Securities and Exchange Commission is effective. This prospectus is not an offer to sell these securities and the selling stockholders are not soliciting offers to buy these securities in any jurisdiction where the offer or sale is not permitted.

Subject to completion, dated November 5, 2012

Tengion, Inc.

109,275,508 shares of common stock

This prospectus relates to the resale, from time to time, of up to 109,275,508 shares of our common stock by the stockholders referred to throughout this prospectus as “selling stockholders.” Of the total shares of our common stock offered in this prospectus, 20,007,002 shares are issuable upon the conversion of senior secured convertible notes (the “Convertible Notes”) sold in a private placement completed on October 2, 2012 (the “2012 Financing”) and 52,843,337 shares are issuable upon the exercise of two-year, five-year and ten-year warrants sold in the 2012 Financing (the “2012 Warrants”). In addition, we are including 36,425,169additional shares of our common stock that may be issued upon exercise of the 2012 Warrants or the conversion of the Convertible Notes in the event of certain adjustments.

The selling stockholders will receive all of the proceeds from the sales made under this prospectus. Accordingly, we will receive no part of the proceeds from sales made under this prospectus. We may, however, receive proceeds upon the cash exercise of the 2012 Warrants. We are paying the expenses incurred in registering the shares, but all selling and other expenses incurred by the selling stockholders will be borne by the selling stockholders.

Our common stock is quoted on the OTCQB platform of OTC Markets, Inc. under the symbol TNGN. On November 2, 2012, the last reported sale price of our common stock on the OTCQB was $1.05 per share.

Investing in the offered securities involves a high degree of risk. See “Risk Factors” beginning on page 10 of this prospectus for a discussion of information that you should consider before investing in our securities.

NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR DETERMINED IF THIS PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.

The date of this prospectus is ________________, 2012

Table of Contents

Page

PROSPECTUS SUMMARY

3

2012 FINANCING

7

RISK FACTORS

10

USE OF PROCEEDS

34

MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

34

SELECTED FINANCIAL DATA

36

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

38

BUSINESS

59

MANAGEMENT

84

COMPENSATION DISCUSSION AND ANALYSIS

88

SUMMARY COMPENSATION TABLE

97

CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

110

PRINCIPAL STOCKHOLDERS

114

DESCRIPTION OF CAPITAL STOCK

118

SELLING STOCKHOLDERS

124

PLAN OF DISTRIBUTION

129

LEGAL MATTERS

130

EXPERTS

130

WHERE YOU CAN FIND MORE INFORMATION

131

INDEX TO FINANCIAL STATEMENTS

F-1

Unless otherwise stated, all references to “us,” “our,” “Tengion,” “we,” the “Company” and similar designations refer to Tengion, Inc. Tengion® and the Tengion logo® are our registered trademarks and Tengion Neo-Bladder Augment™, Tengion Neo-Urinary Conduit™, Tengion Neo-Bladder Replacement™, Tengion Neo-Vessel™ and Tengion Neo-Kidney™ are our trademarks. Other names are for informational purposes only and may be trademarks of their respective owners.

Neither the delivery of this prospectus nor any sale made hereunder shall under any circumstances create an implication that there has been no change in our affairs since the date hereof. This prospectus does not constitute an offer to sell or a solicitation of an offer to buy securities other than those specifically offered hereby or of any securities offered hereby in any jurisdiction where, or to any person to whom, it is unlawful to make such offer or solicitation. The information contained in this prospectus speaks only as of the date of this prospectus unless the information specifically indicates that another date applies.

i

This prospectus has been prepared based on information provided by us and by other sources that we believe are reliable. This prospectus summarizes certain documents and other information in a manner we believe to be accurate, but we refer you to the actual documents, if any, for a more complete understanding of what we discuss in this prospectus. In making a decision to invest in the common stock, you must rely on your own examination of us and the terms of the offering and the common stock, including the merits and risks involved.

We are not making any representation to you regarding the legality of an investment in our common stock under any legal investment or similar laws or regulations. You should not consider any information in this prospectus to be legal, business, tax or other advice. You should consult your own attorney, business advisor and tax advisor for legal, business and tax advice regarding an investment in our common stock.

ii

PROSPECTUS SUMMARY

This summary highlights information contained elsewhere in this prospectus and does not contain all of the information that you should consider in making your investment decision. Before investing in our common stock, you should carefully read this entire prospectus, including our financial statements and the related notes included in this prospectus and the information set forth under the headings “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

Overview

Our Business

Tengion is a regenerative medicine company focused on discovering, developing, manufacturing and commercializing a range of neo-organs, or products composed of living cells, with or without synthetic or natural materials, implanted or injected into the body to engraft into, regenerate, or replace a damaged tissue or organ. Using our Organ Regeneration Platform, we create these neo-organs using a patient’s own cells, or autologous cells. We believe our proprietary product candidates harness the intrinsic regenerative pathways of the body to regenerate a range of native-like organs and tissues. Our product candidates are intended to delay or eliminate the need for chronic disease therapies, organ transplantation, and the administration of anti-rejection medications. In addition, our neo-organs are designed to avoid the need to substitute other tissues of the body for a purpose to which they are poorly suited.

Building on our clinical and preclinical experience, we are initially leveraging our Organ Regeneration Platform to develop our Neo-Urinary Conduit for bladder cancer patients who are in need of a urinary diversion and our Neo-Kidney Augment for patients with advanced chronic kidney disease.

Our Neo-Urinary Conduit is intended to replace the use of bowel tissue in bladder cancer patients requiring a non-continent urinary diversion after bladder removal surgery, or cystectomy. We are able to manufacture our Neo-Urinary Conduit using a proprietary process that takes four weeks or less and uses smooth muscle cells derived from a routine biopsy. We are currently conducting a Phase I clinical trial for our Neo-Urinary Conduit in bladder cancer patients to assess its safety and preliminary efficacy, as well as to translate the surgical implantation procedure utilized in preclinical studies. This trial is an open-label, single-arm study, which is currently expected to enroll up to ten patients. We enrolled our sixth patient in this trial in the third quarter of 2012. In October 2012, we announced the death of two patients enrolled in the trial. Both patients died due to afflictions unrelated to the Neo-Urinary Conduit or the surgical procedure. We notified the Data Safety Monitoring Board of these events and the Phase I clinical trial is ongoing. We continue to focus on enrolling the remaining four patients in our Phase I trial at our six clinical sites by the end of 2012.

While we and our clinical investigators believe that the surgical technique used successfully in animal models has been translated to humans, we are continuing to seek to refine the appropriate post-surgical care of these patients. Assuming appropriate safety data, we anticipate that we will complete implantation of up to ten patients by the end of 2012.

3

Our Neo-Kidney Augment is being developed to prevent or delay dialysis by increasing renal function in patients with advanced chronic kidney disease. Our Neo-Kidney Augment is based on our proprietary technology, which is expected to use the patient’s cells, procured by a needle biopsy of the patient’s kidney, to create an injectable product candidate that can catalyze the regeneration of functional kidney tissue. We recently completed a successful Pre-IND meeting with the U.S. Food and Drug Administration (“FDA”) for the Neo-Kidney Augment. We and the FDA have agreed on a good laboratory practice (“GLP”) animal study program required to support an Investigational New Drug (“IND”) filing and initiation of a Phase I clinical trial in chronic kidney disease (“CKD”) patients. We anticipate we will submit an IND filing for the product candidate during the first half of 2013 and that our Phase I trial will provide initial human proof-of-concept data in 2014. We also continue to explore moving our Neo-Kidney Augment forward in Europe using the Advanced Therapy Medicinal Products, or ATMP, pathway, an established European regulatory route for advanced cell based therapies. We have obtained scientific advice from a European competent authority (Swedish Medicinal Products Agency) and we intend to aggressively pursue our Neo-Kidney Augment development program.

To date, we have devoted substantially all of our resources to the development of our Organ Regeneration Platform and product candidates, as well as to our facilities that we employ to manufacture our neo-organs. Since our inception in July 2003, we have had no revenue from product sales, and have funded our operations principally through the private and public sales of equity securities and debt financings. We have never been profitable and, as of June 30, 2012, we had an accumulated deficit of $238.5 million. We expect to continue to incur significant operating losses for the foreseeable future as we advance our product candidates from discovery through preclinical studies and clinical trials and seek marketing approval and eventual commercialization.

Recent Developments

Neo-Urinary Conduit Phase I Trial

In October 2012, we announced the death of two patients enrolled in our Neo-Urinary Conduit Phase I clinical trial. Both patients died due to afflictions unrelated to the Neo-Urinary Conduit or the surgical procedure. One patient died of metastatic bladder cancer and the other died of cardiopulmonary arrest following a myocardial infarction, or heart attack. Each of these patients’ Neo-Urinary Conduits was properly functioning at the time of their death. We notified the Data Safety Monitoring Board of these events and the Phase I clinical trial is ongoing. We continue to focus on enrolling the remaining four patients in our Phase I trial at our six clinical sites by the end of 2012.

2012 Financing

On October 2, 2012, we conducted a private placement (the “2012 Financing”) of senior secured convertible notes (the “Convertible Notes”) and warrants (the “2012 Warrants”), in which we raised approximately $15 million in gross proceeds. Each of the holders of the demand notes described below exchanged their demand notes for the securities issued in the 2012 Financing. For additional information on the 2012 Financing, see page 7 of this prospectus titled “2012 Financing.”

Venture Debt Amendments

In connection with the 2012 Financing, on October 2, 2012, the Company, Horizon Credit II LLC (“Horizon”) and Horizon Technology Finance Corporation entered into a First Amendment of Venture Loan and Security Agreement (the “Loan Amendment”). The Loan Amendment amends the Venture Loan and Security Agreement dated as of March 14, 2011 pursuant to which Horizon made a loan of $5 million to us (the “Horizon Loan”). The Loan Amendment provides that, effective September 1, 2012, the maturity date for the Horizon Loan is extended from January 1, 2014 until May 1, 2014. We are now required to make monthly interest payments of $39,654.12 through June 1, 2013 and monthly interest and principal payments of $354,779.67 from July 1, 2013 through and including May 1, 2014. Horizon’s security now includes a lien on our intellectual property assets. Effective September 1, 2012, the interest rate on the Horizon Loan was increased from 11.75% to 13.0% per annum.

4

Right of First Negotiation

On October 2, 2012, we entered into a Right of First Negotiation Agreement (the “ROFN Agreement”) with Celgene Corporation (“Celgene”), one of the selling stockholders, pursuant to which we granted Celgene a right of first negotiation to the license, sale, assignment, transfer or other disposition by us of any material portion of intellectual property (including patents and trade secrets) or other assets related to our Neo-Urinary Conduit program. The ROFN Agreement provides for Celgene to receive 2012 Warrants to purchase 50% fewer of the shares that otherwise would have been issued to Celgene in the 2012 Financing. In the event of a change in control of Tengion, the ROFN Agreement and all of Celgene’s rights pursuant thereto will automatically terminate in all respects and be of no further force and effect.

Bridge Financing

On September 7, 2012, we issued demand notes (the “Demand Notes”) in the aggregate amount of $1 million to certain new and existing investors (the “Bridge Financing”). In connection with the transaction, holders of the Demand Notes had the option to exchange the principal balance and accrued interest of their Demand Notes with debt securities and warrants issued by the Company in any subsequent offering.

Reverse Stock Split

On May 30, 2012, we announced that the Board of Directors approved a reverse split of our common stock at a ratio of 1-for-10, effective June 14, 2012. Our common stock began trading on a split-adjusted basis when the Nasdaq Capital Market opened on June 14, 2012.

Listing of our common stock

On September 4, 2012, we were notified by Nasdaq of its determination to delist our common stock from Nasdaq effective at the open of business on September 6, 2012, due to our failure to comply with the minimum $2,500,000 stockholders’ equity requirement for continued listing on the Nasdaq Capital Market. Effective at the opening of the market on September 6, 2012, our common stock was transferred from the Nasdaq Capital Market to the OTCQB, which is operated by OTC Markets, Inc., and continues to trade under the symbol “TNGN.”

Company Information

We were incorporated in the State of Delaware in 2003. Our headquarters are at 3929 Westpoint Boulevard, Suite G, Winston-Salem, North Carolina. Our telephone number is (336) 722-5855 and our Internet website address is www.tengion.com. Information on our website is not incorporated into this prospectus and should not be relied upon in determining whether to make an investment in our common stock.

Our common stock trades on the OTCQB, which is operated by OTC Markets, Inc., under the symbol “TNGN.”

Summary of Risk Factors

Investing in our common stock involves a high degree of risk. Any of the factors set forth on page 10 under “Risk Factors” could harm our business, financial condition, results of operations, or growth prospects. You should carefully consider all of the information set forth in this prospectus and, in particular, the specific factors set forth under “Risk Factors” in deciding whether to invest in our common stock. These important risk factors include, but are not limited to, the following:

5

·

If we do not raise significant amounts of capital, we may not be able to fund our operations or remain in business.

·

We have a substantial amount of debt and contractual obligations that expose us to risks that could adversely affect our business, and we have a history of net losses.

·

Investors could face substantial dilution if our outstanding warrants are exercised or our convertible notes are converted into shares of our common stock.

·

Concentration of ownership of our common stock among our executive officers, directors and their affiliates, as well as the concentration of our common stock on a fully-diluted basis among a small number of existing investors, may prevent new investors from influencing significant corporate decisions.

·

The market price of the shares of our common stock is highly volatile, and purchasers of our common stock could incur substantial losses or lose their entire investment.

·

Even if we successfully develop our product candidates and obtain necessary marketing approvals to commercialize them, there is no assurance that we will be successful in selling our products.

·

If we fail to obtain stockholder approval of an amendment to our certificate of incorporation to increase our authorized shares of common stock, our outstanding Convertible Notes will become immediately due and payable.

6

The Offering

Securities offered by selling stockholders:

1. Up to 20,007,002 shares of common stock issuable upon the conversion of the Convertible Notes.

2. Up to 52,843,337 shares of common stock issuable upon the exercise of the 2012 Warrants.

3. Up to 36,425,169 additional shares of common stock that may be issuable upon the conversion of

the Convertible Notes or exercise of the 2012 Warrants upon certain adjustments.

Securities offered by the Company:

None.

Shares of common stock outstanding as of October 31, 2012:

2,466,914

Use of proceeds:

We will not receive any of the proceeds from the sale by any selling stockholder of common stock. We may receive proceeds upon the cash exercise of the 2012 Warrants, the underlying shares of which are offered under this prospectus. Any proceeds of such warrant exercises will be used for general corporate purposes.

Risk factors:

See “Risk Factors” beginning on page 10 and the other information included in this prospectus for a discussion of factors you should carefully consider before deciding whether to invest in our securities.

Principal market; trading symbol:

OTCQB; TNGN

Throughout this prospectus, when we refer to the shares of our common stock being registered on behalf of the selling stockholders, we are referring to the shares of common stock that may be issuable upon conversion of the Convertible Notes or the exercise of the 2012 Warrants, or any potential adjustments to the shares underlying such securities, sold in the 2012 Financing, described below. When we refer to the selling stockholders in this prospectus, we are referring to the investors in the 2012 Financing who are named in this prospectus as the selling stockholders and, as applicable, any donees, pledgees, transferees or other successors-in-interest selling shares received after the date of this prospectus from the selling stockholders as a gift, pledge, or other non-sale related transfer.

2012 FINANCING

On October 2, 2012, we closed the 2012 Financing, in which we issued Convertible Notes and 2012 Warrants and raised approximately $15 million in gross proceeds.

The Convertible Notes bear interest at 10% per annum, which is payable quarterly. The Convertible Notes are convertible into approximately 20 million shares of common stock at a current conversion price of $0.75 per share. We may, at our option, pay interest by the issuance of freely tradable shares of common stock. If we elect to pay interest on the Convertible Notes through the issuance of shares of our common stock, the number of shares that would be issued is calculated by dividing the amount of the interest payment by the lesser of: (1) the volume weighted average price for our common stock for the twenty trading days prior to the date the interest payment is due (the “VWAP Period”) or (2) the closing bid price for our common stock as of the last trading day of the VWAP Period.

7

The 2012 Warrants are exercisable at an exercise price of $0.75 per share. The 2012 Warrants include (i) five-year warrants to purchase up to 16,672,145 shares of common stock, (ii) ten-year warrants to purchase up to 33,344,293 shares of common stock, and (iii) two-year warrants, issued only to holders of the Demand Notes, to purchase up to 1,118,722 shares of common stock. In addition, we issued Horizon ten-year warrants to purchase 1,138,785 shares of common stock and five-year warrants to purchase 569,392 shares of common stock (collectively, the “Horizon Warrants”). The Horizon Warrants were issued in connection with an amendment to our existing loan agreement with Horizon. The Horizon Warrants have the same terms as the 2012 Warrants and, for purposes of this prospectus and the shares being offered on behalf of the selling shareholders, are included as 2012 Warrants.

The exercise price of the 2012 Warrants and the conversion price of the Convertible Notes may be decreased based upon (a) the volume weighted average price during the five trading day period (the “Five-Day VWAP”) after the first registration statement filed with the Securities and Exchange Commission (the “SEC”) registering the shares of common stock underlying the 2012 Warrants and Convertible Notes is declared effective by the SEC; (b) the Five-Day VWAP after the first trading day following the date on which non-affiliates of the Company can freely sell the shares of common stock underlying the 2012 Warrants and Convertible Notes under Rule 144(b)(i) of the Securities Act of 1933, as amended (the “Securities Act”) in the event the registration statement referenced in (a) above does not register all of the shares of common stock underlying the Convertible Notes and 2012 Warrants; and (c) issuance(s) by the Company of other securities with an issue or exercise price lower than the then existing exercise price or conversion price in effect as described in the 2012 Warrants and Convertible Notes.

The 2012 Warrants also provide for a proportionate adjustment in the number of shares underlying the 2012 Warrants in the event of an adjustment to the exercise price. Therefore, upon an adjustment described in the preceding paragraph, we would have to issue more shares upon the conversion of the Convertible Notes or the exercise of the 2012 Warrants.

In addition to the Convertible Notes and 2012 Warrants issued in the 2012 Financing, we granted the holders of the Convertible Notes the right to require us to sell to such holders up to an additional $20,000,000 in securities on the same terms as the Convertible Notes and 2012 Warrants (the “Call Option”). The Call Option may be exercised by the holders of the Convertible Notes at any time on or before June 30, 2013. The conversion price of the notes and exercise price of the warrants issued pursuant to the terms of the Call Option will be no greater than $0.75 and, may be lower if the conversion price on the Convertible Notes and the exercise price of the 2012 Warrants is adjusted pursuant to the terms of such instruments.

The investors may also cause us to redeem the 2012 Warrants or the Convertible Notes in the event of a “major transaction,” as defined in the 2012 Warrants and Convertible Notes.

We have deposited $1 million of the gross proceeds of the 2012 Financing into an escrow account pursuant to an escrow agreement between us, the holders of the Convertible Notes, and Ballard Spahr LLP, as escrow agent. Upon the achievement of (1) the successful completion of patient implants in the Phase I clinical trial of the Company’s Neo-Urinary Conduit and (2) analysis of in-life data from our GLP studies for the Neo-Kidney Augment that demonstrates that continued development is warranted (the “Milestones”), the holders will instruct the escrow agent to release the escrowed funds to us. If the Milestones are not achieved by March 1, 2013,at the direction of the holders of at least 40% of the aggregate principal amount of the Convertible Notes, including certain specified holders, the escrow agent will transfer to us the portion of the escrowed amount that the holders agree is necessary for the orderly disposition of our assets.

Under the terms of the warrants issued in our March 2011 private placement (the "2011 Warrants"), the 2012 Warrants, and the Convertible Notes, we are required to reserve sufficient shares of common stock to permit the exercise of the 2011 Warrants and 2012 Warrants, the conversion of the Convertible Notes, and the issuance of any shares upon adjustments to these securities. Presently, we do not have sufficient authorized shares of common stock to permit such actions. Therefore, we are seeking stockholder approval to amend our certificate of incorporation to increase the number of authorized shares of our common stock which would enable us to reserve a sufficient number of shares of common stock to provide for the future exercise of the 2011 Warrants, 2012 Warrants, conversion of the Convertible Notes, and issuance of any shares upon adjustments to these securities. If we fail to obtain stockholder approval by December 1, 2012, we will be in default under the terms of our facility agreement with the holders of the Convertible Notes. In such event, the Convertible Notes will become immediately due and payable.

Pursuant to a registration rights agreement with the selling stockholders, we also agreed to file this registration statement with the SEC to register for resale the shares issuable upon conversion of the Convertible Notes or the exercise of the 2012 Warrants.

8

The issuance of securities sold in the 2012 Financing were exempt from registration under the Securities Act, pursuant to the exemption for transactions by an issuer not involving any public offering under Section 4(a)(2) of the Securities Act and Regulation D and Regulation S promulgated under the Securities Act.

For more information on the Convertible Notes, the 2012 Warrants or our registration obligations, see the section of this prospectus titled “Description of Capital Stock.”

9

RISK FACTORS

Investing in our common stock involves a high degree of risk. You should carefully consider the following risk factors, as well as the other information in this prospectus, before deciding whether to invest in shares of our common stock. The occurrence of any of the following risks could harm our business, financial condition, results of operations or growth prospects. In that case, the market price of our common stock could decline, and you may lose all or part of your investment.

Risks Related to Our Financial Position and Need for Additional Capital

In order to fund our operations, we will need to raise significant amounts of capital. We may not be able to raise additional capital when necessary or on acceptable terms to us, if at all.

Based upon our current expected level of operating expenditures and debt repayment, and assuming we are not required to settle any outstanding warrants in cash or redeem, or pay cash interest on, any of our Convertible Notes, we expect to be able to fund operations through May 2013. We intend to pursue additional sources of capital to continue our business operations as currently conducted and fund deficits in operating cash flows. There is no assurance that such financing will be available when needed or, if available, on terms acceptable to us. If we do not raise additional capital by May 31, 2013, we may not be able to fund our operations or remain in business. Our future capital requirements will depend on many factors, including:

·

the scope and results of our clinical trials, particularly regarding the number of patients required and the required duration of follow-up for our clinical trials in support of our product candidates;

·

the scope and results of our research and preclinical development programs;

·

the costs of operating our research and development facility to support our research and early clinical activities;

·

the time, complexity and costs involved in obtaining marketing approvals for our product candidates, which could take longer and be more costly than obtaining approval for a new conventional drug candidate, given the FDA’s limited experience with clinical trials and marketing approval for products derived from a patient’s own cells;

·

the costs of securing commercial manufacturing capacity to support later-stage clinical trials and subsequent commercialization activities, if any;

·

the costs of maintaining, expanding, protecting and enforcing our intellectual property portfolio, including potential dispute and litigation costs and any associated liabilities and potentially challenging the intellectual property of others;

·

the costs of entering new markets outside the United States; and

·

the extent of our contractual obligations and amount of debt service payments we are obligated to make.

10

As a result of these factors, among others, we will need to seek additional funding before we are able to generate positive cash flow from operations. We will need to raise additional funds through collaborative arrangements, public or private sales of debt, equity or equity-linked securities, commercial loan facilities, or some combination thereof. Additional funding may not be available to us on acceptable terms, or at all. If we obtain capital through collaborative arrangements, these arrangements could require us to relinquish some rights to our technologies or product candidates and we may become dependent on third parties. If we raise capital through the sale of equity, or securities convertible into equity, dilution to our then-existing stockholders would result. If we obtain funding through the incurrence of debt, we would likely become subject to covenants restricting our business activities, and holders of debt instruments would have rights and privileges senior to those of our equity investors. In addition, servicing the interest and repayment obligations under our current and future borrowings would divert funds that would otherwise be available to support research and development, clinical or commercialization activities.

If we are unable to obtain adequate financing on a timely basis, we may be required to delay, reduce the scope of or eliminate one or more of our development programs, reduce our personnel, or default on our outstanding debt and contractual obligations, any of which could raise substantial doubt about our ability to continue as a going concern and remain in business.

We have a substantial amount of debt and contractual obligations that expose us to risks that could adversely affect our business, operating results and financial condition.

As of October 31, 2012, we had approximately $18.6 million of outstanding debt, which is secured by liens on substantially all of our assets. Our outstanding debt includes approximately $15 million in Convertible Notes issued in the 2012 Financing and a $3.6 million loan from our venture debt lender, Horizon Credit II LLC. Under the terms of the Convertible Notes, beginning January 1, 2013, we are required to make quarterly interest payments in cash or shares of our common stock at 10% per annum. The Convertible Notes are due October 2, 2015. The holders of our Convertible Notes also have the right to require us to issue on or before June 30, 2013 up to an additional $20 million of securities.

Under the terms of our loan with Horizon Credit II LLC, we are obligated to make interest-only payments through June 1, 2013, followed by monthly payments of principal and interest at an interest rate of 13% per annum through May 1, 2014.

We expect that the annual principal and interest payments on our outstanding debt will be approximately $3.9 million, $3.3 million, and $16.4 million in 2013, 2014, and 2015, respectively. The level and nature of our indebtedness could, among other things:

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make it difficult for us to obtain any necessary financing in the future;

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limit our flexibility in planning for or reacting to changes in our business;

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reduce funds available for use in our operations;

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impair our ability to incur additional debt because of financial and other restrictive covenants or the liens on our assets which secure our current debt;

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hinder our ability to raise equity capital because in the event of a liquidation of the business, debt holders receive a priority before equity holders;

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make us more vulnerable in the event of a downturn in our business; or

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place us at a possible competitive disadvantage relative to less leveraged competitors and competitors that have better access to capital resources.

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The lease agreement for our Pennsylvania manufacturing facility requires us to provide security and restoration deposits totaling $2.2 million to the landlord. In satisfaction of these security deposit obligations, we have deposited $1 million with the landlord and have secured a $1.2 million letter of credit from a bank in favor of the landlord. The letter of credit is collateralized by an account held at the bank. The bank recently informed us that it will not renew the letter of credit beyond December 2, 2012. Therefore, we will need to seek a new letter of credit or deposit cash of up to $1.2 million in an account held by the landlord to satisfy our deposit obligation.

In November 2011, we made a business decision to restructure our corporate operations, consolidate our operations in our Winston-Salem research and development facility and seek to exit our commercial-scale manufacturing facility. We currently have three years left under the lease agreement for our commercial-scale manufacturing facility and a net rental obligation of $3.6 million. While we will seek to sublease or otherwise reduce the net rental obligation of this facility, there can be no assurance that we will be successful in doing so and we will remain contractually liable for the rental obligations under this lease.

Unless we raise substantial additional capital or generate substantial revenue from a licensing transaction or strategic partnership involving one of our product candidates, and there can be no assurance that we will be able to do so, we may not be able to service or repay our debt when it becomes due, in which case our lenders could seek to accelerate payment of all unpaid principal and foreclose on our assets or continue to execute our current business and product development plans.

Any such event would raise substantial doubt about our ability to continue as a going concern and have a material adverse effect on our business, operating results and financial condition.

We have a history of net losses and may not achieve or sustain profitability.

Our recurring losses from operations and our need for significant additional capital to fund anticipated future losses from operations and debt repayment raise substantial doubt about our ability to continue as a going concern, and as a result, our independent registered public accounting firm included an explanatory paragraph in its report on our financial statements as of and for the year ended December 31, 2011 related to this uncertainty. We have incurred losses in each year since our inception and expect to experience losses for the foreseeable future. As of June 30, 2012, we had an accumulated deficit of $238.5 million. We had net losses of $29.8 million, $25.6 million, and $19.1 million in the years ended December 31, 2009, 2010, and 2011, respectively, and $8.27 million as of June 30, 2012. These losses resulted principally from costs incurred in our clinical trials, research and development programs, construction of our research laboratories and commercial manufacturing facility, and from our general and administrative expenses. These losses, among other things, have had and will continue to have an adverse effect on our stockholders’ equity, total assets and working capital.

We expect to continue to incur significant operating expenses and anticipate that our expenses and losses will increase in the foreseeable future as we seek to further develop our product candidates, technology and manufacturing capabilities. Our expenses are expected to relate to the following:

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continuing research and development efforts, including relating to our Neo-Kidney Augment;

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conducting our Phase I clinical trial for our Neo-Urinary Conduit for patients with bladder cancer who require removal of their bladder;

expanding our manufacturing capabilities to support commercialization of our current and future product candidates; and

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servicing and repaying indebtedness.

The extent of our future operating losses is highly uncertain, and we may never achieve or sustain profitability. If we are unable to achieve and then maintain profitability, the market value of our common stock will decline.

If we do not successfully develop our product candidates and obtain the necessary marketing approvals to commercialize them, we will not generate sufficient revenues to continue our business operations.

In order to obtain marketing approval of our product candidates so that we can generate revenues once they are commercialized, we must conduct extensive preclinical studies and clinical trials to demonstrate that our product candidates are safe and effective and obtain and maintain approval of our manufacturing facilities. Our early stage product candidates, including our Neo-Urinary Conduit, for which we have commenced a Phase I clinical trial, may fail to perform as we expect. Moreover, our Neo-Urinary Conduit and our other product candidates may ultimately fail to demonstrate the necessary safety and efficacy for marketing approval. Even if results from preclinical studies and early phase clinical trials are positive, there can be no assurances that later stage studies or trials will be successful. We will need to conduct additional research and development, and devote significant additional financial resources and personnel to develop commercially viable products and obtain the necessary marketing approvals, and if we fail to do so successfully, we may cease operations altogether.

Our limited operating history may make it difficult for you to evaluate the success of our business to date and to assess our future viability.

We are a development-stage company. We commenced operations in July 2003. Our operations to date have been limited to organizing and staffing the Company, acquiring and developing our technology, and undertaking preclinical studies and clinical trials of our product candidates. We have not demonstrated an ability to successfully complete large-scale clinical trials, obtain marketing approvals for product registration, manufacture a commercial-scale product or arrange for a third party to do so on our behalf, or conduct sales and marketing activities necessary for successful product commercialization. As a result, we have a limited operating history.

Even if we are successful in obtaining marketing approval for any of our product candidates, we will need to transition from a company with a research focus to a company capable of supporting commercial activities. We may not be successful in such a transition.

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If we are unable to obtain stockholder approval of an amendment to our certificate of incorporation to increase our authorized shares of common stock, the Convertible Notes will become immediately due and payable and we may be unable to meet our payment obligation.

Under the terms of the warrants issued in our March 2011 private placement (the “2011 Warrants”), the 2012 Warrants, and the Convertible Notes, we are required to reserve sufficient shares of common stock to permit the exercise of the 2011 Warrants and 2012 Warrants, the conversion of the Convertible Notes, and the issuance of any shares upon adjustments to these securities. Presently, we do not have sufficient authorized shares of common stock to permit such actions. Therefore, we have agreed to seek stockholder approval in order to amend our certificate of incorporation to increase the number of authorized shares of our common stock and to reserve a sufficient number of shares of common stock to provide for the future exercise of the 2011 Warrants, 2012 Warrants, conversion of the Convertible Notes, and issuance of any shares upon adjustments to these securities. If we fail to obtain stockholder approval by December 1, 2012, we will be in default under the terms of our facility agreement with the holders of the Convertible Notes. In such event, the Convertible Notes will become immediately due and payable. If that occurs, we will not be able to pay the amounts due under the Convertible Notes and will likely need to seek protection under the U.S. bankruptcy laws.

If we fail to satisfy our registration obligations in connection with the 2012 Financing, we would be required to make certain cash payments to holders of the 2012 Warrants and Convertible Notes.

In connection with the 2012 Financing, we have agreed to file a registration statement, of which this prospectus is a part, to register for resale the shares of common stock issuable upon exercise of the 2012 Warrants, the conversion of the Convertible Notes, and upon adjustments to the 2012 Warrants and Convertible Notes, up to the maximum number of shares able to be registered pursuant to applicable SEC regulations. We are obligated to use our best efforts to cause the initial registration statement to become effective by December 31, 2012. If any of the shares are unable to be included on the initial registration statement, we have agreed to file subsequent registration statements by certain dates until all the underlying shares have been registered or may be freely tradable. We are obligated to maintain the effectiveness of the registration statements until all the shares are sold or otherwise can be sold without registration and without any restrictions. If we fail to satisfy our registration obligations or specified filing and effectiveness dates, we must make cash payments to the holders of the 2012 Warrants and the Convertible Notes. Such cash payments would significantly reduce funds available for use in our operations and could adversely affect our business.

Risks Related to the Development of Our Product Candidates

Our clinical trials may not be successful.

We will only obtain marketing approval to commercialize a product candidate if we can demonstrate to the satisfaction of the FDA or the applicable non-United States regulatory authority, in clinical trials, that the product candidate is safe and effective, and otherwise meets the appropriate standards required for approval for a particular indication. Clinical trials are lengthy, complex and extremely expensive processes with uncertain results. A failure of one or more of our clinical trials may occur at any stage of testing.

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We are currently conducting a Phase I open-label, single-arm study of our Neo-Urinary Conduit in patients who are undergoing bladder removal due to bladder cancer. We have designed this trial to assess the safety and preliminary efficacy of the Neo-Urinary Conduit. This trial is also intended to allow our clinical investigators to optimize and, as necessary, modify the surgical implantation technique and post-operative care based on the experience gained by prior patients enrolled. As we have limited experience with this product candidate in humans, we may have difficulty optimizing the surgical implantation of the Neo-Urinary Conduit. Six patients have been enrolled and implanted in this clinical trial; two patients, however, died as a result of health issues unrelated to our Neo-Urinary Conduit product candidate. Based upon the experience of the first three patients, clinical investigators have made surgical modifications in an effort to address stoma patency, conduit integrity and vascular supply. Assuming appropriate safety data, we anticipate that we will complete implantation of up to ten patients by the end of 2012. There can be no assurance that, as part of our Phase I clinical trial, patients will not experience additional complications and/or serious adverse events related to our Neo-Urinary Conduit or experience serious adverse events that, although not related to our product candidate, could have a materially detrimental impact on our clinical trial. Additionally, we may determine, based upon this trial, that our Neo-Urinary Conduit demonstrates limited safety and/or efficacy.

We may find it difficult to enroll patients in our clinical trials.

Our initial product candidates are designed to treat diseases that affect relatively few patients. This could make it difficult for us to enroll the number of patients that may be required for the clinical trials we would be required to conduct in order to obtain marketing approval for our product candidates.

In addition, we may have difficulty finding eligible patients to participate in our clinical trials because our trials may include stringent enrollment criteria. For example, a patient may require a concomitant surgical procedure that would prevent them from being enrolled in a clinical trial, may be using alternative therapies, or the extent of a patient’s overall medical condition may render such patient ineligible to participate in our trials. Our Neo-Urinary Conduit has limited experience in humans and patients may not want to enroll in a trial where they are among the first group of patients to receive this product candidate. Additionally, as we have been developing the surgical procedure in the first group of patients, each of the first three patients receiving our Neo-Urinary Conduit have experienced complications and serious adverse events which could have the effect of discouraging others from enrolling in this trial. Our inability to enroll a sufficient number of patients for any of our current or future clinical trials would result in significant delays and could require us to abandon one or more clinical trials altogether.

Our product development programs are based on novel technologies and are inherently risky.

We are subject to the risks of failure inherent in the development of products based on new technologies. The novel nature of our Organ Regeneration Platform creates significant challenges with respect to product development and optimization, manufacturing, government regulation and approval, third-party reimbursement and market acceptance. For example, the FDA has relatively limited experience with the development and regulation of autologous neo-organs and, therefore, the pathway to marketing approval for our product candidates may accordingly be more complex, lengthy and uncertain than for a more conventional new drug candidate. The FDA may not approve our product candidates or may approve them with certain restrictions that may limit our ability to market our product candidates, and our product candidates may not be successfully commercialized, if at all.

We have limited experience in conducting and managing the preclinical development activities and clinical trials necessary to obtain marketing approvals necessary for marketing our product candidates, including approval by the FDA.

Our efforts to develop all of our product candidates are at an early stage. We may be unable to progress our product candidates that are undergoing preclinical testing into clinical trials. Success in preclinical testing and early clinical trials does not ensure that later clinical trials will be successful, and favorable initial results from a clinical trial do not necessarily predict outcomes in subsequent clinical trials. The indications of use for which we are pursuing development may have clinical effectiveness endpoints that have not previously been reviewed or validated by the FDA, which may complicate or delay our effort to ultimately obtain FDA approval. We cannot guarantee that our clinical trials will ultimately be successful.

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We have not obtained marketing approval or commercialized any of our product candidates. We may not successfully design or implement clinical trials required for marketing approval to market our product candidates. We might not be able to demonstrate that our product candidates meet the appropriate standards for marketing approval, particularly as our technology may be the first of its kind to be reviewed by the FDA. If we are not successful in conducting and managing our preclinical development activities or clinical trials or obtaining marketing approvals, we might not be able to commercialize our product candidates, or might be significantly delayed in doing so, which will materially harm our business.

If we are not able to retain qualified management and scientific personnel, we may fail to develop our technologies and product candidates.

Our future success depends to a significant extent on the skills, experience and efforts of the principal members of our scientific and management personnel. These members include John L. Miclot, our President and Chief Executive Officer, and Timothy Bertram, D.V.M., Ph.D., our President, Research and Development and Chief Scientific Officer. The loss of either or both of these individuals could harm our business and might significantly delay or prevent the achievement of research, development or business objectives. Competition for personnel is intense and our financial position may make it difficult to retain or attract management and scientific qualified personnel. We may be unable to retain our current personnel or attract or integrate other qualified management and scientific personnel in the future.

We rely on third parties to conduct certain preclinical development activities and our clinical trials, and those third parties may not perform satisfactorily.

We do not conduct in our facilities certain preclinical development activities of our product candidates, such as preclinical studies in animals, nor do we conduct clinical trials for our product candidates ourselves. We rely on, or work in conjunction with, third parties, such as contract research organizations, medical institutions and clinical investigators, to perform these functions. Our reliance on these third parties for preclinical and clinical development studies reduces our control over these activities. We are responsible for ensuring that each of our preclinical development activities and our clinical trials is conducted in accordance with the applicable U.S. federal and state laws and foreign regulations, general investigational plans and protocols. However, other than our contracts with these third parties, we have no direct control over these researchers or contractors, as they are not our employees. Moreover, the FDA requires us to comply with standards, commonly referred to as Good Clinical Practices, or GCP, for conducting, recording and reporting the results of our clinical trials to assure that data and reported results are credible and accurate and that the rights, safety and confidentiality of trial participants are protected. Our reliance on third parties that we do not control does not relieve us of these responsibilities and requirements. Furthermore, these third parties also may have relationships with other entities, some of which may be our competitors. If these third parties do not successfully carry out their contractual duties, meet expected deadlines or conduct our preclinical development activities or our clinical trials in accordance with regulatory requirements or our stated protocols, we will not be able to obtain, or may be delayed in obtaining, marketing approvals for our product candidates and will not be able to, or may be delayed in our efforts to, successfully commercialize our product candidates. These third parties may be warned, suspended or otherwise sanctioned by the FDA or other government or regulatory authorities for failing to meet the applicable requirements imposed on such third parties. As a result, the third parties may not be able to fulfill their contractual obligations, and the results obtained from the preclinical and clinical research using their services may not be accepted by the FDA to support the marketing approval of our product candidates. If the third parties or their employees become debarred by the FDA, we cannot use the research data derived from their services to support the marketing approval of our product candidates. Finally, these third parties may be bought by other entities, change their business plans or strategies or they may go out of business, thereby preventing them from meeting their contractual obligations to us.

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We may not be able to secure and maintain relationships with research institutions and clinical investigators that are capable of conducting and have access to necessary patient populations for the conduct our clinical trials.

We rely on research institutions and clinical investigators to conduct our clinical trials. Our reliance upon research institutions, including hospitals and clinics, provides us with less control over the timing and cost of clinical trials and the ability to recruit subjects. If we are unable to reach agreement with suitable research institutions and clinical investigators on acceptable terms, or if any resulting agreement is terminated because, for example, the research institution and/or clinical investigators lose their licenses or permits necessary to conduct our clinical trials, we may be unable to quickly replace the research institution and/or clinical investigator with another qualified research institution and/or clinical investigator on acceptable terms. We may not be able to secure and maintain agreement with suitable research institutions to conduct our clinical trials.

Compliance with governmental regulations regarding the treatment of animals used in research could increase our operating costs, which would adversely affect the commercialization of our technology.

The Animal Welfare Act, or AWA, is the federal law that covers the treatment of certain animals used in research. Currently, the AWA imposes a wide variety of specific regulations that govern the humane handling, care, treatment and transportation of certain animals by producers and users of research animals, most notably relating to personnel, facilities, sanitation, cage size, feeding, watering and shipping conditions. Third parties with whom we contract are subject to registration, inspections and reporting requirements. Furthermore, some states have their own regulations, including general anti-cruelty legislation, which establish certain standards in handling animals. If we or any of our contractors fail to comply with regulations concerning the treatment of animals used in research, we may be subject to fines and penalties and adverse publicity, and our operations could be adversely affected.

Public perception of ethical and social issues may limit or discourage the type of research we conduct.

Our clinical trials involve people, and we and third parties with whom we contract also do research involving animals. Governmental authorities could, for public health or other purposes, limit the use of human or animal research or prohibit the practice of our technology. Public attitudes may be influenced by claims that our technology or that regenerative medicine generally is unsafe for use in research or is unethical and akin to cloning. In addition, animal rights activists could protest or make threats against our facilities, which may result in property damage and subsequently delay our research. Ethical and other concerns about our methods, particularly our use of human subjects in clinical trials or the use of animal testing, could adversely affect our market acceptance.

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Risks Related to the Manufacturing of Our Product Candidates

We have only limited experience manufacturing our product candidates. We may not be able to manufacture our product candidates in quantities sufficient for our clinical trials and/or any commercial launch of our product candidates.

We may encounter difficulties in the production of our product candidates. Construction of neo-organs from autologous live human cells involves strict adherence to complex manufacturing and storage protocols and procedures. Early stage clinical manufacturing is conducted in our pilot facility and, while we have supported clinical manufacturing from this location, future difficulties may arise which limit our production capability and delay progress in our clinical trials. Currently, we also occupy a commercial-scale manufacturing facility. As a result of our November 2011 business decision to restructure our corporate operations, we have decided to consolidate our operations in our Winston-Salem research and development facility and to seek to exit our commercial-scale manufacturing facility. As a result of this decision, as our product candidates advance into later-stage clinical trials toward commercialization, we will need to either develop our own internal manufacturing capability or contract with a third-party manufacturer to conduct this manufacturing on our behalf. Obtaining our own commercial scale manufacturing capacity will be costly and time consuming. Additionally, we may have difficulty finding suitable third parties with the manufacturing expertise that we need. These occurrences could increase our costs or cause delays in the production of our product candidates necessary for any Phase III clinical trial and/or any anticipated commercial launch of our product candidates, any of which could damage our reputation and harm our business.

The current manufacture of our product candidates involves the use of regulated animal tissues, and future product candidates may also use animal-sourced materials.

We currently utilize several bovine-derived products, such as growth media, in the manufacture of our Neo-Urinary Conduit. Bovine-sourced materials are strictly regulated in the United States and other jurisdictions due to their capacity to transmit the prior disease Bovine Spongiform Encephalopathy, or BSE, which manifests itself in humans as Creutzfeldt-Jakob Disease. Although we obtain our supply of bovine-based materials from closed herds in jurisdictions that are not currently known to carry BSE, there can be no assurance that these herds will remain BSE-free or that a future outbreak or presence of other unintended and potentially hazardous agents would not adversely affect our product candidates or patients that may receive them. Further, our future product candidates may involve the use of bovine-sourced or other animal-based materials, which could increase the risk of transmission of other diseases carried by such animals.

If a natural or man-made disaster strikes our manufacturing facility, we would be unable to manufacture our product candidates for a substantial amount of time, which would harm our business.

Our manufacturing facility and manufacturing equipment would be difficult to replace and could require substantial replacement lead-time and additional funds if we lost use of either the facility or equipment. Our facility may be affected by natural disasters, such as floods. We do not currently have back-up capacity, so in the event our facility or equipment was affected by man-made or natural disasters, we would be unable to manufacture any of our product candidates until such time as our facility could be repaired or rebuilt. Although, currently we maintain global property insurance with property limits of $27.1 million and business interruption insurance coverage of $5.4 million for damage to our property and the disruption of our business from fire and other casualties, such insurance may not be sufficient to cover all of our potential losses and may not continue to be available to us on acceptable terms, or at all.

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Our business involves the use of hazardous materials that could expose us to environmental and other liability.

Our research and development processes and our operations involve the controlled storage, use and disposal of hazardous materials including, but not limited to, biological hazardous materials. We are subject to federal, state and local regulations governing the use, manufacture, storage, handling and disposal of these materials and waste products. Although we believe that our safety procedures for handling and disposing of these hazardous materials comply with the standards prescribed by law and regulation, the risk of accidental contamination or injury from hazardous materials cannot be completely eliminated. In the event of an accident, we could be held liable for any damages that result, and any liability could exceed the limits or fall outside the coverage of our insurance. Moreover, we may not be able to maintain insurance to cover these risks on acceptable terms, or at all. We could also be required to incur significant costs to comply with current or future laws and regulations relating to hazardous materials. We currently maintain insurance coverage that is consistent with similar companies in our stage of development. In addition to global property insurance, we maintain general liability insurance coverage of $2 million with an excess liability insurance of $4 million, and workers’ compensation coverage of $0.5 million per incident. Such insurance may not be sufficient to cover all of our potential losses and may not continue to be available to us on acceptable terms, or at all.

Risks Related to Marketing Approval and Other Government Regulations

We cannot market and sell our product candidates in the United States or in other countries if we fail to obtain the necessary marketing approvals or licensure.

We cannot sell our product candidates until regulatory agencies grant marketing approval, or licensure. The process of obtaining such marketing approval is lengthy, expensive and uncertain. It is likely to take many years to obtain the required marketing approvals for our product candidates or we may never gain the necessary approvals. Any difficulties that we encounter in obtaining marketing approval may have a substantial adverse impact on our operations and cause our stock price to decline significantly. Any adverse events in our clinical trials for one of our product candidates could negatively impact the clinical trials and approval process for our other product candidates.

To obtain marketing approvals in the United States for our product candidates, we must, among other requirements, complete carefully controlled and well-designed clinical trials sufficient to demonstrate to the FDA that the product candidate is safe and effective for each indication for which we seek approval. Several factors could prevent completion or cause significant delay of these trials, including an inability to enroll the required number of patients or failure to obtain FDA approval to commence a clinical trial. Negative or inconclusive results from, or adverse events during, a preclinical safety study or clinical trial could cause the preclinical study or clinical trial to be repeated or a program to be terminated, even if other studies or trials relating to the program are successful. The FDA can place a clinical trial on hold if, among other reasons, it finds that patients enrolled in the trial are or would be exposed to an unreasonable and significant risk of illness or injury. If safety concerns develop, we, an Institutional Review Board, or IRB, or the FDA could stop our trials before completion. The populations for which we are developing our product candidates may have other medical complications that would affect their experience in our trials and would affect their experience with our product candidates, if approved. A serious adverse event is an event that results in significant medical consequences, such as hospitalization or prolonged hospitalization, disability or death, and if unexpected must be reported to the FDA. We cannot guarantee that other safety concerns regarding our product candidates will not develop.

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The pathway to marketing approval for our product candidates may be more complex and lengthy than for approval of a conventional new drug or biologic. Similarly, to obtain approval to market our product candidates outside of the United States, we will need to submit clinical data concerning our product candidates and receive marketing approval from governmental agencies, which in certain countries includes approval of the price we intend to charge for our product. We may encounter delays or rejections if changes occur in regulatory agency policies, or if reports from preclinical and clinical testing on similar technology or products raise safety and/or efficacy concerns, during the period in which we develop a product candidate or during the period required for review of any application for marketing approval. If we are not able to obtain marketing approvals for use of our product candidates under development, we will not be able to commercialize such products and, therefore, may not be able to generate sufficient revenues to support our business.

The FDA may impose requirements on our clinical trials that are difficult to comply with, which could harm our business.

The requirements the FDA may impose on clinical trials for our product candidates are uncertain. As a result, we cannot guarantee that we will be able to comply with such requirements. For example, the FDA may require endpoints in our late-stage clinical trials that are different from or in addition to the endpoints in our early-stage clinical trials or the endpoints which we may propose. The endpoints or other study elements, including sample size, the FDA requires may make it less likely that our Phase III clinical trials are successful or may delay completion of the trials. If we are unable to comply with the FDA’s requirements, we will not be able to get approval for our product candidates and our business will suffer.

If we are not able to conduct our clinical trials properly and on schedule, marketing approval by the FDA and other regulatory authorities may be delayed or denied.

Our clinical trials may be delayed or terminated for many reasons, including, but not limited to, if:

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the FDA does not grant permission to proceed or places the trial on clinical hold;

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subjects do not enroll or remain in our trials at the rate we expect;

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we fail to manufacture necessary amounts of product candidate;

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our pilot manufacturing facility is ordered by FDA or other government or regulatory authority to temporarily or permanently shut down due to violations of current Good Manufacturing Practice, or cGMP, or other applicable requirements, or infections or cross-contaminations of product candidates in the manufacturing process;

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subjects choose an alternative treatment for the indications for which we are developing our product candidates, or participate in competing clinical trials;

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subjects experience an unacceptable rate or severity of adverse side effects;

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reports from preclinical or clinical testing on similar technologies and products raise safety and/or efficacy concerns;

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third-party clinical investigators lose their license or permits necessary to perform our clinical trials, do not perform our clinical trials on our anticipated schedule or consistent with the clinical trial protocol, Good Clinical Practice and regulatory requirements, or other third parties do not perform data collection and analysis in a timely or accurate manner;

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inspections of clinical trial sites by the FDA or IRBs find regulatory violations that require us to undertake corrective action, suspend or terminate one or more sites, or prohibit us from using some or all of the data in support of our marketing applications;

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third-party contractors become debarred or suspended or otherwise penalized by FDA or other government or regulatory authorities for violations of regulatory requirements, in which case we may need to find a substitute contractor, and we may not be able to use some or any of the data produced by such contractors in support of our marketing applications; or

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one or more IRBs or our Data Safety Monitoring Board, or DSMB, refuses to approve, suspends or terminates the trial at an investigational site, precludes enrollment of additional subjects, or withdraws its approval of the trial.

If we are unable to conduct our clinical trials properly and on schedule, the FDA may delay or deny marketing approval.

Final marketing approval of our product candidates by the FDA or other regulatory authorities for commercial use may be delayed, limited, or denied, any of which would adversely affect our ability to generate operating revenues.

Any of the following factors, if one or more were to occur, could cause final marketing approval for our product candidates to be delayed, limited or denied:

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our product candidates could fail to demonstrate safety and efficacy in preclinical or clinical testing;

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the manufacturing processes for our product candidates could fail to consistently demonstrate their safety and purity;

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the FDA could disagree with the clinical endpoints we propose for our clinical trials and refuse to allow us to conduct clinical trials utilizing clinical endpoints we believe are appropriate;

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it could take many years to complete the testing of our product candidates, and failure can occur at any stage of the process;

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negative results or adverse side effects during a clinical trial could cause us to delay or terminate development efforts for a product candidate;

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the FDA could seek the advice of an Advisory Committee of physician and patient representatives that may view the risks of our product candidates as outweighing the benefits;

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the FDA could require us to expand the size and scope of the clinical trials; or

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the FDA could impose post-marketing restrictions.

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Our development costs will increase if we have material delays in our clinical trials, or if we are required to modify, suspend, terminate or repeat a clinical trial. If marketing approval for our product candidates is delayed, limited or denied, our ability to market products, and our ability to generate product sales, would be adversely affected.

Any product for which we obtain marketing approval could be subject to restrictions or withdrawal from the market and we may be subject to penalties if we fail to comply with regulatory requirements or if we experience unanticipated problems with our product candidates, when and if any of them are approved.

Any product for which we obtain marketing approval, along with the manufacturing processes, post-approval clinical data, labeling, advertising and promotional activities for such product, will be subject to continual requirements of and review by the FDA and comparable regulatory authorities, including through periodic inspections. These requirements include, but are not limited to, submissions of safety and other post-marketing information and reports, registration requirements, cGMP and Quality System Regulation, or QSR, requirements relating to quality control, quality assurance and corresponding maintenance of records and documents. Even if marketing approval of a product is granted, the approval may be subject to limitations on the indicated uses for which the product may be marketed or to other conditions of approval, or may contain requirements for costly and time consuming post-marketing testing and surveillance to monitor the safety or efficacy of the product. Discovery after approval of previously unknown problems with our product candidates or manufacturing processes, or failure to comply with regulatory requirements, may result in actions such as:

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restrictions on such products’ manufacturers or manufacturing processes;

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restrictions on the marketing or distribution of a product, including refusals to permit the import or export of products;

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warning letters or untitled letters;

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warning labels on the products;

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withdrawal of the products from the market;

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refusal to approve pending applications or supplements to approved applications that we submit;

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suspension of any ongoing clinical trials;

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recall of products;

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fines, restitution or disgorgement of profits or revenue;

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suspension or withdrawal of marketing approvals;

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product seizure;

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injunctions; or

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imposition of civil or criminal penalties.

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In addition, if any of our product candidates are approved, our product labeling, advertising and promotion would be subject to regulatory requirements and continuing regulatory review. The FDA strictly regulates the promotional claims that may be made about prescription products. In particular, a product may not be promoted for uses that are not approved by the FDA as reflected in the product’s approved labeling. The FDA and other agencies actively enforce the laws and regulations prohibiting the promotion of off-label uses, and a company that is found to have improperly promoted off-label uses may be subject to significant sanctions.

Current or future legislation may make it more difficult and costly for us to obtain marketing approval of our product candidates.

In 2007, the Food and Drug Administration Amendments Act of 2007, or the FDAAA, became law. This legislation grants significant new powers to the FDA, many of which are aimed at assuring the safety of drugs and biologics after approval. For example, FDAAA granted the FDA new authority to impose post-approval clinical study requirements, require safety-related changes to product labeling and require the adoption of risk management plans, referred to as risk evaluation and mitigation strategies, or REMS. The REMS may include requirements for special labeling or medication guides for patients, special communication plans to health care professionals, and restrictions on distribution and use. Pursuant to FDAAA, if the FDA makes the requisite findings, it might require that a new product be used only by physicians with specified specialized training, only in specified designated health care settings, or only in conjunction with special patient testing and monitoring. The legislation also included requirements for disclosing clinical study results to the public through a clinical study registry, and renewed requirements for conducting clinical studies to generate information on the use of products in pediatric patients. Under the FDAAA, companies that violate the new law are subject to substantial civil monetary penalties. The requirements and changes imposed by the FDAAA may make it more difficult, and more costly, to obtain and maintain approval of new biological products.

In addition, the FDA’s regulations, policies or guidance may change and new or additional statutes or government regulations may be enacted that could prevent or delay marketing approval of our product candidates or further restrict or regulate post-approval activities. For example, proposals have been made to further expand post-approval requirements and restrict sales and promotional activities. It is impossible to predict whether additional legislative changes will be enacted, or whether the FDA regulations, guidance or interpretations will be changed, or what the impact of such changes or the marketing approvals of our product candidates, if any, may be.

Risks Related to the Commercialization of Our Product Candidates

If we fail to educate and train physicians as to the distinctive characteristics, benefits, safety, clinical efficacy and cost-effectiveness of our product candidates, our sales will not grow.

Acceptance of our product candidates depends, in large part, on our ability to train physicians in the proper implantation of our neo-organs, which will require significant expenditure of our resources. Convincing physicians to dedicate the time and energy necessary to properly train to use new products and techniques is challenging, and we may not be successful in these efforts. If physicians are not properly trained, they may ineffectively implant our product candidates. Such misuse or ineffective implantation may result in unsatisfactory patient outcomes, patient injury, negative publicity or lawsuits against us. Accordingly, even if our product candidates are superior to alternative treatments, our success will depend on our ability to gain and maintain market acceptance for our product candidates. If we fail to do so, our sales will not grow and our business, financial condition and results of operations will be adversely affected. We may not have adequate resources to effectively educate the medical community and/or our efforts may not be successful due to physician resistance or perceptions regarding our product candidates.

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We face uncertainty related to pricing, reimbursement and health care reform, which could reduce our revenue.

Sales of our product candidates, if approved for commercialization, will depend in part on the availability of coverage and reimbursement from third-party payors such as government insurance programs, including Medicare and Medicaid, private health insurers, health maintenance organizations and other health care related organizations. If our product candidates are approved for commercialization, pricing and reimbursement may be uncertain. Both the federal and state governments in the United States and foreign governments continue to propose and pass new legislation affecting coverage and reimbursement policies, which are designed to contain or reduce the cost of health care. Further federal and state proposals and health care reforms are likely which could limit the prices that can be charged for the product candidates that we develop and may further limit our commercial opportunity. There may be future changes that result in reductions in current coverage and reimbursement levels for our products, if commercialized, and we cannot predict the scope of any future changes or the impact that those changes would have on our operations.

Adoption of our product candidates by the medical community may be limited if doctors and hospitals do not receive full reimbursement for our products, if commercialized. Cost control initiatives may decrease coverage and payment levels for our product candidates and, in turn, the price that we will be able to charge for any product. We are impacted by efforts by public and private third-party payors to control costs. We are unable to predict all changes to the coverage or reimbursement methodologies that will be applied by private or government payors to our product candidates. Any denial of private or government payor coverage or inadequate reimbursement for procedures performed using our products, if commercialized, could harm our business and reduce our revenue.

We could be adversely affected if healthcare reform measures substantially change the market for medical care or healthcare coverage in the United States.

The U.S. Congress recently adopted legislation regarding health insurance, which has been signed into law. As a result of this new legislation, substantial changes could be made to the current system for paying for healthcare in the United States, including changes made in order to extend medical benefits to those who currently lack insurance coverage. Extending coverage to a large population could substantially change the structure of the health insurance system and the methodology for reimbursing medical services, drugs and devices. These structural changes could entail modifications to the existing system of private payors and government programs, such as Medicare, Medicaid and State Children’s Health Insurance Program, creation of a government-sponsored healthcare insurance source, or some combination of both, as well as other changes. Restructuring the coverage of medical care in the United States could impact the reimbursement for prescribed drugs, biopharmaceuticals, medical devices, or our product candidates. If reimbursement for our approved product candidates, if any, is substantially less that we expect in the future, or rebate obligations associated with them are substantially increased, our business could be materially and adversely impacted.

Extending medical benefits to those who currently lack coverage will likely result in substantial cost to the U.S. federal government, which may force significant changes to the healthcare system in the United States. Much of the funding for expanded healthcare coverage may be sought through cost savings. While some of these savings may come from realizing greater efficiencies in delivering care, improving the effectiveness of preventive care and enhancing the overall quality of care, much of the cost savings may come from reducing the cost of care. Cost of care could be reduced by decreasing the level of reimbursement for medical services or products, or by restricting coverage and, thereby, utilization of medical services or products. In either case, a reduction in the utilization of, or reimbursement for, any product for which we receive marketing approval in the future could have a materially adverse impact on our financial performance.

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There is substantial uncertainty regarding the exact meaning and interpretation of the provisions of healthcare reform that have been enacted. This uncertainty limits our ability to forecast changes that may occur in the future and to manage our business accordingly.

We may face competition from companies and institutions that may develop products that make ours less attractive or obsolete through both new technologies that may be similar to ours, or more traditional pharmaceutical or medical device treatments.

Many of our competitors have greater resources or capabilities than we have, or may already have or succeed in developing better products or in developing products more quickly than we do, and we may not compete successfully with them.

The medical device, pharmaceutical and biotechnology industries are highly competitive. We compete for funding. If our product candidates become available for commercial sale, we will compete in the marketplace. For funding, we compete primarily with other companies which, like us, are focused on discovering and developing novel products or therapies for the treatment of human disease based on regenerative medicine technologies or other novel scientific principles. In the marketplace, we may eventually compete with other companies and organizations that are marketing or developing therapies for our targeted disease indications, based on traditional pharmaceutical, medical device or other, non-cellular therapies and technologies.

We also face competition in the cell therapy field from academic institutions and governmental agencies. Many of our current and potential competitors have greater financial and human resources than we have, including more experience in research and development and more established sales, marketing and distribution capabilities.

We anticipate that competition in our industry will increase. In addition, the health care industry is characterized by rapid technological change, resulting in new product introductions and other technological advancements. Our competitors may develop and market products that render our current product or any future product non-competitive or otherwise obsolete.

The use of our product candidates in human subjects may expose us to product liability claims, and we may not be able to obtain adequate insurance.

We face an inherent risk of product liability claims. Our clinical-stage product candidates are in early development and have not been used over an extended period of time in a large number of patients and, therefore, our long-term safety and efficacy data are limited. Patients have experienced in the past and may experience in the future serious adverse events. Our current product liability coverage is $5 million per occurrence and in the aggregate. We will need to increase our insurance coverage if and when we begin commercializing any of our product candidates. We may not be able to obtain or maintain product liability insurance on acceptable terms with adequate coverage. If claims against us substantially exceed our coverage, then our business could be adversely impacted. Regardless of whether we are ultimately successful in any product liability litigation, such litigation could consume substantial amounts of our financial and managerial resources and could result in, among others:

25

·

significant awards against us;

·

substantial litigation costs;

·

injury to our reputation and the reputation of our product candidates; and

We have never marketed a product before, and if we are unable to establish an effective focused sales force and marketing infrastructure, we will not be able to commercialize our product candidates successfully.

We intend to explore building the necessary marketing and sales infrastructure to market and sell our current product candidates, if they receive marketing approval. We currently do not have internal sales, distribution and marketing capabilities. The development of a sales and marketing infrastructure for our domestic operations will require substantial resources, will be expensive and time consuming and could negatively impact our commercialization efforts, including delay of any product launch. These costs may be incurred in advance of any approval of our product candidates. In addition, we may not be able to hire a focused sales force in the United States that is sufficient in size or has adequate expertise in the medical markets that we intend to target, including surgery. If we are unable to establish our focused sales force and marketing capability for our product candidates, we may not be able to generate any product revenue, may generate increased expenses and may never become profitable.

If we are unable to establish development or marketing collaborations with third parties, we may not be able to develop, commercialize or distribute our products successfully.

We may need to establish development or marketing collaborations with third parties in order to complete development of our product candidates or for the commercialization or distribution of our product candidates. We expect to face competition in our efforts to identify appropriate collaborators or partners to help develop or commercialize our product candidates in our target commercial areas. If we are unable to establish adequate collaborations, our ability to develop or market our product candidates could be adversely affected. Further, to the extent third parties with whom we collaborate fail to perform, our ability to achieve our development or marketing goals may be adversely affected, and our business could suffer.

Risks Related to Intellectual Property

If we are unable to obtain and maintain protection for our intellectual property, the value of our technology and products will be adversely affected.

Our success will depend in large part on our ability to obtain and maintain protection in the United States and other countries for the intellectual property covering or incorporated into our technology and products. The patent situation in the field of biotechnology and pharmaceuticals generally is highly uncertain and involves complex legal, technical, scientific and factual questions. We may not be able to obtain additional issued patents relating to our technology or products. Even if issued, patents issued to us or our licensors may be challenged, narrowed, invalidated, held to be unenforceable or circumvented, or determined not to cover our product candidates or our competitors’ products, which could limit our ability to stop competitors from marketing identical or similar products or reduce the term of patent protection we may have for our product candidates. Changes in either patent laws or in interpretations of patent laws in the United States and other countries may diminish the value of our intellectual property or narrow the scope of our patent protection. The degree of future protection for our proprietary rights is uncertain, and we cannot ensure that:

26

·

we or our licensors were the first to make the inventions covered by each of our pending patent applications;

·

we or our licensors were the first to file patent applications for these inventions;

·

others will not independently develop similar or alternative technologies or duplicate any of our technologies;

·

any patents issued to us or our licensors will provide a basis for commercially viable products, will provide us with any competitive advantages or will not be successfully challenged by third parties;

·

we will continue developing additional proprietary technologies that are patentable;

·

we will file patent applications for new proprietary technologies promptly or at all;

·

our patents will not expire prior to or shortly after commencing commercialization of a product;

·

our licensors will enforce the rights of the patents we license; or

·

the patents of others will not have a negative effect on our ability to do business.

In addition, we cannot guarantee that any of our pending patent applications will result in issued patents. If patents are not issued in respect of our pending patent applications, we may not be able to stop competitors from marketing products similar to ours.

Our patents also may not afford us protection against competitors with identical or similar technology.

Because patent applications in the United States and many other jurisdictions are typically not published until 18 months after filing, or in some cases not at all, and because publications of discoveries in the scientific literature often lag behind the actual discoveries, neither we nor our licensors can be certain that we or they were the first to make the inventions claimed in our or their issued patents or pending patent applications, or that we or they were the first to file for protection of the inventions set forth in these patent applications. If a third party has also filed a United States patent application covering our product candidates or a similar invention, we may have to participate in an adversarial proceeding, known as an interference, declared by the United States Patent and Trademark Office to determine priority of invention in the United States. The costs of these proceedings could be substantial and it is possible that our efforts could be unsuccessful, resulting in a loss of our United States patent position. If a third party believes we or our licensor were not entitled to the grant of one or more patents, such third party may challenge such patents in an interference or re-examination proceeding in the United States, or opposition or similar proceeding in another country.

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If we fail to comply with our obligations in our intellectual property licenses with third parties, we could lose license rights that are important to our business.

We are a party to license agreements with Children’s Hospital Boston and Wake Forest University Health Sciences pursuant to which we license certain intellectual property relating to our product candidates. We may enter into additional licenses in the future. Our existing licenses impose, and we expect that future licenses will impose, various diligence, milestone payment, royalty, insurance and other obligations on us. If we fail to comply with these obligations, the licensor may have the right to terminate the license, in which event we might not be able to market any product that is covered by the licensed patents.

If we are unable to protect the confidentiality of our proprietary information, trade secrets and know-how, the value of our technology and product candidates could be adversely affected.

Our proprietary information, trade secrets and know-how are important components of our intellectual property, particularly in connection with the manufacturing of our product candidates. We seek to protect our proprietary information, trade secrets, know-how and confidential information, in part, by confidentiality agreements with our employees, corporate partners, outside scientific collaborators, sponsored researchers, consultants and other advisors. We also have confidentiality and invention or patent assignment agreements with our employees and our consultants. If our employees or consultants breach these agreements, we may not have adequate remedies for any of these breaches. In addition, our proprietary information, trade secrets and know-how may otherwise become known to or be independently developed by others. Enforcing a claim that a party illegally obtained and is using our proprietary information, trade secrets and know-how is difficult, expensive and time consuming, and the outcome is unpredictable. In addition, courts outside the United States may be less willing to protect trade secrets. Costly and time consuming litigation could be necessary to seek to enforce and determine the scope of our proprietary information, trade secrets and know-how, and failure to obtain or maintain protection of proprietary information, trade secret and know-how could adversely affect our competitive business position.

If we infringe or are alleged to infringe the intellectual property rights of third parties, our business could suffer.

Our research, development and commercialization activities, as well as any product candidates or products resulting from these activities, may infringe or be accused of infringing one or more claims of an issued patent or may fall within the scope of one or more claims in a published patent application that may subsequently issue and to which we do not hold a license or other rights. Third parties may own or control these patents or patent applications in the United States and abroad. These third parties could bring claims against us that would cause us to incur substantial expenses and, if successful against us, could cause us to pay substantial damages. Further, if a patent infringement suit were brought against us, we could be forced to stop or delay research, development, manufacturing or sales of the product or product candidate that is the subject of the suit. No assurance can be given that patents do not exist, have not been filed, or could not be filed or issued, which contain claims covering our product candidates, technology or methods.

In order to avoid or settle potential claims with respect to any of the patent rights described above or any other patent rights of third parties, we may choose or be required to seek a license from a third party and be required to pay license fees or royalties or both. These licenses may not be available on acceptable terms, or at all. Even if we or our future collaborators were able to obtain a license, the rights may be non-exclusive, which could result in our competitors gaining access to the same intellectual property. Ultimately, we could be prevented from commercializing one or more product candidates, or be forced to cease some aspect of our business operations, if, as a result of actual or threatened patent infringement claims, we are unable to enter into licenses on acceptable terms. This could harm our business significantly.

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Others may sue us for infringing their patent or other intellectual property rights or file nullity, opposition, re-examination or interference proceedings against our patents, even if such claims or proceedings are without merit, which would similarly harm our business. Furthermore, during the course of litigation, confidential information may be disclosed in the form of documents or testimony in connection with discovery requests, depositions or trial testimony. Disclosure of our confidential information and our involvement in intellectual property litigation could materially adversely affect our business.

There has been substantial litigation and other proceedings regarding patent and other intellectual property rights in the pharmaceutical and biotechnology industries. In addition to infringement claims against us, we may become a party to other patent litigation and other proceedings, including interference proceedings declared by the United States Patent and Trademark Office and opposition proceedings in the European Patent Office, regarding intellectual property rights with respect to our product candidates and technology. Even if we prevail, the cost to us of any patent litigation or other proceeding could be substantial.

Some of our competitors may be able to sustain the costs of complex patent litigation more effectively than we can because they have substantially greater resources. In addition, any uncertainties resulting from any litigation could significantly limit our ability to continue our operations. Patent litigation and other proceedings may also absorb significant management time. Many of our employees were previously employed at universities or other biotechnology or pharmaceutical companies, including our competitors or potential competitors. We try to ensure that our employees do not use the proprietary information, trade secrets or know-how of others in their work for us. However, we may be subject to claims that we or these employees have inadvertently or otherwise used or disclosed intellectual property, trade secrets, know-how or other proprietary information of any such employee’s former employer. Litigation may be necessary to defend against these claims and, even if we are successful in defending ourselves, could result in substantial costs to us or be distracting to our management. If we fail to defend any such claims, in addition to paying monetary damages, we may jeopardize valuable intellectual property rights, disclose confidential information or lose personnel.

Risks Related to our Common Stock

Our common stock is currently quoted on the over-the-counter market, which may make it more difficult to resell shares of our common stock.

On September 6, 2012, our common stock ceased trading on the Nasdaq market and became quoted on the OTCQB, an over-the-counter market. This market lacks the credibility of established stock markets and is characterized by a lack of liquidity, sporadic trading and larger gaps between bid and ask prices. Compared to a seasoned issuer with stock traded on an established market, which typically results in a large and steady volume of trading activity, there may be periods when trading activity in our shares is minimal or nonexistent. In addition, our common stock is deemed to be “penny stock”, which means stock traded at a price less than $5 per share, which will make it unsuitable for some investors to purchase. Furthermore, the SEC imposes additional rules on broker-dealers that recommend the purchase or sale of penny stock. These additional burdens may discourage broker-dealers from effecting transactions in our common stock and may limit the number of stock brokers that are willing to act as market makers for our common stock. As a result, purchasers of our common stock may be unable to resell their shares.

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The market price of the shares of our common stock is highly volatile, and purchasers of our common stock could incur substantial losses.

The market price of our common stock has fluctuated significantly since our initial public offering, and our stock price is likely to continue to be volatile. The over-the-counter market in general and the market for biotechnology companies in particular have experienced extreme volatility that has often been unrelated to the operating performance of particular companies. The market price for our common stock may be influenced by many factors, including:

·

setbacks or difficulties associated with our clinical trials;

·

our ability to enroll patients in our clinical trials;

·

results of clinical trials of our product candidates or those of our competitors;

·

regulatory developments in the United States and foreign countries;

·

variations in our financial results or those of companies that are perceived to be similar to us;

·

changes in the structure of healthcare payment systems, especially in light of current reforms to the U.S. healthcare system;

·

announcements by us of significant acquisitions, strategic partnerships, joint ventures or capital commitments;

·

market conditions in the pharmaceutical and biotechnology sectors and issuance of securities analysts’ reports or recommendations;

·

sales of substantial amounts of our stock by existing stockholders;

·

sales of our stock by insiders and 5% stockholders;

·

general economic, industry and market conditions;

·

additions or departures of key personnel;

·

intellectual property, product liability or other litigation against us;

·

expiration or termination of our relationships with our collaborators; and

·

the other factors described in this “Risk Factors” section.

In addition, in the past, stockholders have initiated class action lawsuits against biotechnology and pharmaceutical companies following periods of volatility in the market prices of these companies’ stock. Such litigation, if instituted against us, could cause us to incur substantial costs and divert management’s attention and resources, which could have a material adverse effect on our business, financial condition and results of operations.

30

The future sale of our common stock could negatively affect our stock price.

Sales of substantial amounts of our common stock in the public market, or the perception that these sales could occur, could cause the market price of our common stock to decline. These sales could also make it more difficult for us to sell equity or equity-related securities in the future at times or prices that we deem appropriate. As of October 31, 2012, we had 2,466,914 shares of common stock outstanding, and notes and warrants which are convertible and exercisable respectively, into at least 74 million shares of common stock (subject to adjustment upward in accordance with the terms of such notes and warrants). The currently outstanding shares can be freely sold in the public market and some of the shares subject to warrants, upon issuance, may also be freely sold in the public market, subject, in each case, to certain restrictions imposed by federal securities laws on the holders of our shares. In addition, we may pay interest that accrues on our Convertible Notes with shares of freely tradable common stock.

We also currently have under our stock option and equity incentive plans 247,952 shares reserved for issuance related to equity awards granted to our officers, directors and employees and an additional 58,483 shares reserved for issuance, all of which, when issued, may be freely sold in the public market, subject to certain restrictions imposed by federal securities laws on our affiliates.

Concentration of ownership of our outstanding common stock among our executive officers, directors and their affiliates, as well as the concentration of our common stock on a fully-diluted basis among a small number of existing investors, may prevent new investors from influencing significant corporate decisions.

As of October 31, 2012, our executive officers, directors and their affiliates own, in the aggregate, approximately 30% of the 2,466,914 shares of our outstanding common stock. In addition, our executive officers and directors hold options to purchase 264,503 shares of common stock upon exercising their options at a weighted-average exercise price of $9.19 per share. Funds and entities affiliated with directors hold Convertible Notes and warrants, which are convertible and exercisable respectively, into at least 3 million shares of common stock (subject to adjustment upward in accordance with the terms of such notes and warrants). Furthermore, a small number of existing investors hold Convertible Notes and warrants, which are convertible and exercisable respectively, into at least 74 million shares of common stock (subject to adjustment upward in accordance with the terms of such notes and warrants). The conversion of the Convertible Notes and exercise of the warrants could lead to substantial dilution to existing and new stockholders. To the extent we pay interest on our Convertible Notes with shares of common stock, the percentage of our outstanding shares held by these investors will increase. Furthermore, these persons, if acting together, would be able to significantly influence all matters requiring stockholder approval, including the election and removal of directors and any merger or other significant corporate transactions. The interests of this group of investors may not coincide with our interests or the interests of existing stockholders.

We will need to raise additional capital to fund our operations, which may cause dilution to our existing stockholders, restrict our operations or require us to relinquish rights.

We may seek additional capital through a combination of private and public equity offerings, debt financings and collaboration, strategic and licensing arrangements. To the extent that we raise additional capital through the sale of equity or convertible debt securities, your ownership interest may be diluted, and the terms may include liquidation or other preferences that adversely affect your rights as a stockholder. In addition, the 2011 Warrants, 2012 Warrants, and Convertible Notes provide that the exercise price or conversion price, as applicable, of such warrants or convertible notes would be decreased in the event we subsequently issue stock at a price per share less than the current exercise price or conversion price per share of the warrants or convertible notes. Furthermore, the 2011 Warrants and 2012 Warrants contain provisions that would proportionately increase the number of shares for which such warrants are exercisable. Debt financing, if available, may involve agreements that include covenants limiting or restricting our ability to take specific actions such as incurring debt, making capital expenditures or declaring dividends. If we raise additional funds through collaboration, strategic alliance and licensing arrangements with third parties, we may have to relinquish valuable rights to our technologies or product candidates or grant licenses on terms that are not favorable to us.

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If we raise additional capital, certain holders of our 2012 Warrants and Convertible Notes have call options, which, if exercised, could require us to issue a significant number of shares, resulting in substantial dilution to our existing stockholders.

We entered into a securities purchase agreement in connection with the 2012 Financing, which gave the parties thereto the option to purchase up to an additional $20 million in securities on the same terms as the Convertible Notes and 2012 Warrants. The conversion price of the convertible notes and exercise price of the warrants issued pursuant to the terms of this call option will be no greater than $0.75 and, may be lower if the conversion price on the Convertible Notes and the exercise price of the 2012 Warrants are adjusted pursuant to the terms of such instruments. Therefore, we may be required to issue a significant number of shares which could result in substantial dilution to our existing stockholders.

Certain provisions of the securities issued in connection with our March 2011 private placement and 2012 Financing provide for preferential treatment to the holders of the securities and could impede a sale of the Company.

The 2011 Warrants and the 2012 Warrants give each holder the option to receive a cash payment based on a Black-Scholes valuation of the warrant upon a change in control of the Company. In the case of the 2011 Warrants, the method of calculating the Black-Scholes value, includes the requirement to calculate the Black-Scholes value using a minimum volatility of 100%. In the case of the 2012 Warrants, the Black-Scholes value must be calculated using an average historical volatility for certain trading day periods. The cash payment could be greater than the consideration that our other equity holders would receive in a change in control transaction. In addition, holders of the Convertible Notes and the 2012 Warrants have the option to require us to redeem these securities upon a change in control transaction. The provisions of the 2011 Warrants, 2012 Warrants and the Convertible Notes could make a change in control transaction more expensive for a potential acquirer and could negatively impact our ability to pursue and consummate such a transaction.

Certain provisions of Delaware law and of our charter documents contain provisions that could delay and discourage takeover attempts and any attempts to replace our current management by stockholders.

Certain provisions of our certificate of incorporation and bylaws, and applicable provisions of Delaware corporate law, may make it more difficult for or prevent a third party from acquiring control of us or changing our board of directors and management. These provisions include:

·

the ability of our board of directors to issue preferred stock with voting or other rights or preferences;

·

the inability of stockholders to act by written consent;

·

a classified board of directors with staggered three-year terms;

·

requirement that special meetings of our stockholders may only be called upon a resolution adopted by an affirmative vote of a majority of our board of directors; and

·

requirements that our stockholders comply with advance notice procedures in order to nominate candidates for election to our board of directors or to place stockholders’ proposals on the agenda for consideration at meetings of stockholders.

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We are afforded the protections of Section 203 of the Delaware General Corporation Law, which prevents us from engaging in a business combination with a person who acquires at least 15% of our common stock for a period of three years from the date such person acquired such common stock, unless prior board or stockholder approval was obtained.

Any delay or prevention of a change of control transaction or changes in our board of directors or management could deter potential acquirers or prevent the completion of a transaction in which our stockholders could receive a substantial premium over the then-current market price for their shares.

We do not expect to pay cash dividends on our common stock in the foreseeable future.

We do not anticipate paying cash dividends on our common stock in the foreseeable future. Any payment of cash dividends will depend upon our financial condition, results of operations, capital requirements and other factors and will be at the discretion of our board of directors. Accordingly, you will have to rely on capital appreciation, if any, to earn a return on your investment in our common stock. Currently, we are subject to contractual restrictions on the payment of dividends under certain of our debt instruments. Furthermore, we may become subject to additional contractual restrictions or prohibitions on the payment of dividends.

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USE OF PROCEEDS

The selling stockholders will receive all of the proceeds from the sale of the shares offered for sale by them under this prospectus. We will not receive any proceeds from the resale of shares by the selling stockholders covered by this prospectus. We may receive proceeds upon the cash exercise of the 2012 Warrants, the underlying shares of which are offered under this prospectus. Any such proceeds will be used for general corporate purposes.

MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

Market Information

Our common stock traded on the Nasdaq Global Market from April 9, 2010 until April 3, 2012 under the symbol “TNGN.” From April 4, 2012 until September 5, 2012, our stock traded on the Nasdaq Capital Market. Effective September 6, 2012, our common stock is quoted on the OTCQB, which is operated by OTC Markets, Inc., and continues to trade under the symbol “TNGN.”

The following table provides, for the periods indicated, the high and low bid prices for our common stock. These quotations reflect inter-dealer prices, without retail mark-up, mark-down or commission, and may not represent actual transactions. The share prices have been adjusted to give effect to the 1-for-10 reverse stock split effective June 14, 2012.

Fiscal Year 2010

High

Low

First quarter

--

--

Second quarter (beginning April 9, 2010)

$

52.40

$

33.30

Third quarter

$

42.40

$

27.50

Fourth quarter

$

33.20

$

20.30

Fiscal Year 2011

High

Low

First quarter

$

62.40

$

23.60

Second quarter

$

28.20

$

10.40

Third quarter

$

16.00

$

5.30

Fourth quarter

$

6.00

$

3.30

Fiscal Year 2012

High

Low

First quarter

$

10.70

$

4.50

Second quarter

$

6.30

$

2.50

Third quarter

$

3.40

$

1.01

Fourth quarter (throughNovember 2, 2012)

$

1.49

$

0.87

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Holders of Record

On November 2, 2012, the closing price per share of our common stock was $1.05 as reported on the OTCQB and there were approximately 123 holders of record. Because many of our shares are held by brokers and other institutions on behalf of stockholders, we are unable to estimate the total number of stockholders represented by these record holders.

Dividends

We have never declared or paid any cash dividends on our common stock. We currently do not plan to declare dividends on shares of our common stock in the foreseeable future. We expect to retain our future earnings, if any, for use in the operation and expansion of our business. In addition, in certain circumstances, we are prohibited by various borrowing arrangements from paying cash dividends without the prior written consent of the lenders.

Our transfer agent and registrar is American Stock Transfer and Trust Company, located at 6201 15th Avenue, Brooklyn, New York 11219.

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SELECTED FINANCIAL DATA

The following selected financial data should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our financial statements and the related notes appearing elsewhere in this prospectus. The statements of operations data for the years ended December 31, 2009, 2010, and 2011, and the balance sheet data as of December 31, 2010 and 2011 have been derived from our audited financial statements and related notes, which are included elsewhere in this prospectus. The statement of operations data for the year ended December 31, 2007 and 2008 and the balance sheet data as of December 31, 2007, 2008, and 2009 have been derived from audited financial statements which do not appear in this prospectus. The statements of operations data for the six-month period ended June 30, 2012 and 2011, and the balance sheet data as of June 30, 2012 have been derived from our unaudited financial statements and related notes, which are included elsewhere in this prospectus. The historical results presented (in thousands, except per share data) are not necessarily indicative of future results. The per share data has been revised to reflect the 1-for-10 reverse stock split effective June 14, 2012.

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with “Selected Financial Data” and our financial statements and related notes appearing elsewhere in this prospectus. In addition to historical information, this discussion and analysis contains forward-looking statements that involve risks, uncertainties, and assumptions. Our actual results may differ materially from those anticipated in these forward-looking statements as a result of certain factors, including but not limited to those set forth under “Risk Factors” and elsewhere in this prospectus. Per share and share data has been adjusted to reflect the 1-for-10 reverse stock split effective June 14, 2012.

Overview

We believe we are the only regenerative medicine company focused on discovering, developing, manufacturing and commercializing a range of neo-organs, which we define as products composed of living cells, with or without synthetic or natural materials, implanted into the body to incorporate, replace or regenerate a damaged tissue or organ. Our Organ Regeneration Platform enables us to create proprietary product candidates that are intended to harness the intrinsic regenerative pathways of the body to produce a range of native-like organs and tissues. Our product candidates eliminate the need to utilize other tissues of the body for a purpose to which they are poorly suited, to procure donor organs or to administer anti-rejection medications. We are developing neo-organs in our scalable manufacturing facilities using efficient and repeatable proprietary processes, and have implanted neo-organs in our clinical trials. We intend to develop our technology to address unmet medical needs in urologic, renal, and other diseases and disorders.

To date, we have devoted substantially all of our resources to the development of our Organ Regeneration Platform and product candidates, as well as to our facilities that we employ to manufacture our neo-organs. Since our inception in July 2003, we have had no revenue from product sales, and have funded our operations principally through the private and public sales of equity securities and debt financings. We have never been profitable and, as of June 30, 2012, we had an accumulated deficit of $238.5 million, including $48.4 million of cumulative accretion on redeemable convertible preferred stock through April 2010. We expect to continue to incur significant operating losses for the foreseeable future as we advance our product candidates from discovery through preclinical studies and clinical trials and seek marketing approval and eventual commercialization.

Cash, cash equivalents and short-term investments at June 30, 2012 were $3.7 million, representing 60.8% of total assets.

Financial Operations Overview

Research and Development Expense

Our research and development expense consists of expenses incurred in developing and testing our product candidates and are expensed as incurred. Research and development expense consists of:

payments made to third-party contract research organizations for preclinical studies, investigative sites for clinical trials and consultants;

·

costs associated with regulatory filings and the advancement of our product candidates through preclinical studies and clinical trials;

·

laboratory and other supplies;

·

manufacturing development costs; and

·

facility maintenance.

Preclinical study and clinical trial costs for our product candidates are a significant component of our current research and development expenses. We track and record information regarding external research and development expenses on a per study basis. Preclinical studies are currently coordinated with third-party contract research organizations and expense is recognized based on the percentage completed by study at the end of each reporting period. Clinical trials are currently coordinated through a number of contracted sites and expense is recognized based on a number of factors, including actual and estimated patient enrollment and visits, direct pass-through costs and other clinical site fees. We utilize employees, resources and facilities across multiple product candidates. We do not allocate internal research and development expenses among product candidates.

The following table summarizes our research and development expense for the six months ended June 30, 2011 and 2012 (in thousands):

Six months ended June 30,

2011

2012

Change

Third-party direct program expenses:

Urologic

$

429

$

340

$

(89

)

Renal

1,112

992

(120

)

Total third-party direct program expenses

1,541

1,332

(209

)

Other research and development expense

5,201

4,151

(1,050

)

Total research and development expense

$

6,742

$

5,483

$

(1,259

)

39

The following table summarizes our research and development expense for the years ended December 31, 2009, 2010, and 2011 (in thousands):

Year Ended December 31,

2009

2010

2011

Third-party direct program expenses:

Urologic

$

2,753

$

194

$

707

Renal

1,000

1,813

2,314

Total third-party direct program expenses

3,753

2,007

3,021

Other research and development expense

14,195

10,848

10,272

Total research and development expense

$

17,948

$

12,855

$

13,293

From our inception in July 2003 through June 30, 2012, we have incurred research and development expense of $123.3 million. We expect that a large percentage of our research and development expense in the future will be incurred in support of our current and future preclinical and clinical development programs. These expenditures are subject to numerous uncertainties in timing and cost to completion. We expect to continue to test our product candidates in preclinical studies for toxicology, safety and efficacy, and to conduct additional clinical trials for each product candidate. If we are not able to engage a partner prior to the commencement of later stage clinical trials, we may fund these trials ourselves. As we obtain results from clinical trials, we may elect to discontinue or delay clinical trials for certain product candidates or programs in order to focus our resources on more promising product candidates or programs. Completion of clinical trials by us or our future collaborators may take several years or more, but the length of time generally varies according to the type, complexity, novelty and intended use of a product candidate. The cost of clinical trials may vary significantly over the life of a project as a result of differences arising during clinical development, including, among others:

·

the number of sites included in the trials;

·

the length of time required to enroll suitable patients;

·

the number of patients that participate in the trials;

·

the duration of patient follow-up;

·

the development stage of the product candidate; and

·

the efficacy and safety profile of the product candidate.

None of our product candidates has received FDA or foreign regulatory marketing approval. In order to grant marketing approval, the FDA or foreign regulatory agencies must conclude that clinical data establish the safety and efficacy of our product candidates. Furthermore, our strategy includes entering into collaborations with third parties to participate in the development and commercialization of our product candidates. In the event that third parties have control over the clinical trial process for a product candidate, the estimated completion date would largely be under control of that third party rather than under our control. We cannot forecast with any degree of certainty which of our product candidates will be subject to future collaborations or how such arrangements would affect our development plan or capital requirements.

40

As a result of the uncertainties discussed above, we are unable to determine the duration and completion costs of our development projects or when and to what extent we will receive cash inflows from the commercialization and sale of an approved product candidate.

General and Administrative Expense

General and administrative expense consists primarily of salaries, benefits and other related costs, including stock-based compensation, for persons serving in our executive, finance, legal, marketing planning and human resource functions. Our general and administrative expense includes facility-related costs not otherwise included in research and development expense, professional fees for legal services, including patent-related expense, tax and accounting services, and other consulting services and general corporate expenses applicable to public companies. We expect that our general and administrative expenses will increase with the development and potential commercialization of our product candidates.

Depreciation Expense

Depreciation expense is the amortization of capitalized property and equipment that is recognized over the estimated useful lives of the assets using the straight-line method. We use a life of three years for computer equipment; five years for laboratory, office and warehouse equipment; seven years for furniture and fixtures; and the lesser of the useful life of the asset or the remaining life of the underlying facility lease for leasehold improvements. Expenditures for maintenance, repairs, and betterments that do not prolong the useful life of the asset are charged to expense as incurred.

The change in the fair value of our preferred stock warrants consists of non-cash interest for the warrants that were classified as a liability prior to our initial public offering in April 2010 and warrants issued in connection with a private placement transaction in March 2011and were revalued at each reporting date with changes in the fair value reported in the statements of operations. The fair value of the warrants were subject to fluctuations based on changes in the Company’s preferred stock price, expected volatility, remaining contractual life, and the risk-free interest rate.

Net Operating Losses and Tax Loss Carryforwards

As of December 31, 2011, we had net operating loss carryforwards available to offset future federal and state taxable income of $138.6 million and $153.6 million, respectively, as well as $5.2 million of research and development tax credits. The net operating loss carryforwards and credits expire at various dates through 2031. The Tax Reform Act of 1986 (the “Tax Reform Act”) provides for a limitation on the annual use of net operating loss and research and development tax credit carryforwards following certain ownership changes (as defined by the Tax Reform Act) that could limit our ability to utilize these carryforwards. We have not completed a study to assess whether an ownership change has occurred, or whether there have been multiple ownership changes since our formation, due to the significant costs and complexities associated with a study. We may have experienced various ownership changes, as defined by the Tax Reform Act, as a result of past financings. Accordingly, our ability to utilize the aforementioned carryforwards may be limited. Additionally, U.S. tax laws limit the time during which these carryforwards may be applied against future taxes; therefore, we may not be able to take full advantage of these carryforwards for federal or state income tax purposes.

41

Critical Accounting Policies and Use of Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make significant judgments and estimates that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of expenses during the reporting period. Management bases these significant judgments and estimates on historical experience and other assumptions it believes to be reasonable based upon information presently available. Actual results could differ from those estimates under different assumptions, judgments or conditions.

All of our significant accounting policies are discussed in Note 3, Summary of Significant Accounting Policies, to our annual financial statements, included elsewhere in this prospectus. We have identified the following as our critical accounting policies and estimates, which are defined as those that are reflective of significant judgments and uncertainties, are the most pervasive and important to the presentation of our financial condition and results of operations and could potentially result in materially different results under different assumptions, judgments or conditions. Management has reviewed these critical accounting policies and estimates with the Audit Committee of our board of directors.

Impairment of Long-lived Assets

Long-lived assets, such as property and equipment, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Conditions that would necessitate an impairment assessment include a significant change in the planned use of the acquired asset, a decline in the observable market value of an asset, or a significant adverse change in the business such as the occurrence of a negative clinical regulatory matter that would prohibit us from obtaining the approval for commercializing a product candidate. Upon identification of an indicator of impairment, recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to the estimated undiscounted future cash flows expected to be generated by the asset. If the carrying amount of an asset exceeds its estimated undiscounted future cash flows, then an impairment charge is recognized by the amount by which the carrying amount of the asset exceeds the estimated fair value of the asset.

The evaluation of the recoverability of long-lived assets, and the determination of their fair value should such fair values need to be estimated, requires us to make significant estimates and assumptions. These estimates and assumptions include, but are not limited to, the estimation of future cash flows, discount rates and costs to sell. Due to the inherent uncertainty involved in making these estimates, actual results could differ from those estimates. Such a change in assumptions could have a significant impact on the conclusion that an asset’s carrying value is recoverable, or the determination of any impairment charge if it was determined that the asset values were indeed impaired.

42

During the year ended December 31, 2011, we recorded a non-cash property and equipment impairment charge of $7.4 million in connection with the restructuring plan announced in November 2011. Under the restructuring plan, we eliminated plans to use our facility in East Norriton, Pennsylvania as a manufacturing center and centralized our research and development operations in our leased facility in Winston-Salem, North Carolina.

Preclinical and Clinical Trial Costs

A substantial portion of our ongoing research and development activities are performed under agreements we enter into with external service providers who conduct many of our research and development activities. Estimates of incurred costs are made to determine the accrued balance in any accounting period. The estimates incurred under the contracts are based on factors such as work performed, milestones achieved, patient enrollment and costs historically incurred for similar contracts. As actual costs become known, we adjust our estimates. To date, our estimates have been within management’s expectations, and no material adjustments to research and development expense have been recognized. For the year ended December 31, 2011, a 10% increase or decrease in our estimate of research and development expense incurred under such contracts would result in an increase or decrease in research and development expense of approximately $11,000. We may expand the level of research and development activity to be performed by external service providers in which case our estimates would be more material to our future operations. Subsequent changes in estimates may result in a material change in our accruals, which could also materially affect our future results of operations

Warrant Liability

We account for stock warrants as either equity instruments or derivative liabilities depending on the specific terms of the warrant agreement. Stock warrants that allow for cash settlement or provide for modification of the warrant exercise price are accounted for as derivative liabilities under Financial Accounting Standards Board (“FASB”) Accounting Standard Codification (ASC) 815, Derivatives and Hedging (“ASC 815”). We classify derivative warrant liabilities on the balance sheet as a current liability, which is revalued at each balance sheet date subsequent to the initial issuance.

In March 2011, we issued warrants to purchase 1,046,102 shares of common stock in connection with a private placement transaction. We valued the warrants as derivative financial instruments as of the date of issuance (March 4, 2011) and will continue to do so at each reporting date, with any changes in fair value being recorded on the Statements of Operations. During the year ended December 31, 2011, we recorded non-operating income of $14.4 million due to decreases in the estimated fair value of the warrants. During the six months ended June 30, 2012, we recorded non-operating expense of $0.7 million due to changes in the estimated fair value of these warrants.

The warrants contain provisions that require the modification of the exercise price and shares to be issued under certain circumstances, including in the event we complete subsequent equity financings at a price per share lower than the then-current warrant exercise price. In addition, the warrants contain a net cash settlement provision under which the warrant holders may require us to purchase the warrants in exchange for a cash payment following the announcement of specified events defined as Fundamental Transactions involving the Company (e.g., merger, sale of all or substantially all assets, tender offer, or share exchange) or a Delisting, which is deemed to occur when the common stock is no longer listed on a national securities exchange.

The net cash settlement provision requires use of the Black-Scholes model in calculating the cash payment value in the event of a Fundamental Transaction or a Delisting. The net cash settlement value at the time of any future Fundamental Transaction or Delisting will depend upon the value of the following inputs at that time: the price per share of our common stock, the volatility of our common stock, the expected term of the warrant, the risk-free interest rate based on U.S. Treasury security yields, and our dividend yield. The warrant requires use of a volatility assumption equal to the greater of (i) 100%, (ii) the 30-day volatility determined as of the trading day immediately following announcement of a Fundamental Transaction or Delisting, or (iii) the arithmetic average of the 10, 30, and 50-day volatility determined as of the trading day immediately following announcement of a Fundamental Transaction or Delisting.

43

The fair value of the warrants is determined using a risk-neutral lattice methodology within a Monte Carlo analysis to model the impact of potential modifications to the warrant exercise price and to include the probability of a Fundamental Transaction or Delisting into the calculation of fair value. The valuation of warrants is subjective and is affected by changes in inputs to the valuation model including the price per share of our common stock, assumptions regarding the expected amounts and dates of future equity financing activities, assumptions regarding the likelihood and timing of Fundamental Transactions or a Delisting, the historical volatility of the stock prices of our peer group, risk-free rates based on U.S. Treasury security yields, and our dividend yield. Changes in these assumptions can materially affect the fair value estimate. We could, at any point in time, ultimately incur amounts significantly different than the carrying value. For example, as of June 30, 2012, the calculated cash settlement value of $2.3 million exceeded the fair value of $1.8 million. We will continue to classify the fair value of the warrants as a liability until the warrants are exercised, expire, or are amended in a way that would no longer require these warrants to be classified as a liability.

The following table summarizes the calculated aggregate fair values and net cash settlement value as of the dates indicated along with the assumptions utilized in each calculation.

Fair value as of:

Net cash settlement

value as of

June 30, 2012

March 4, 2011

June 30, 2012

Calculated aggregate value

$

16,947

$

1,820

$

2,289(1)

Exercise price per share of warrant

$

28.80

$

28.80

$

28.80

Closing price per share of common stock

$

26.00

$

2.95

$

2.95

Volatility

65.0%

108.0%

172.6%(2)

Probability of Fundamental Transaction or Delisting

48.9%

62.6%

Not applicable

Expected term (years)

Not applicable

Not applicable

3.7

Risk-free interest rate

2.2%

0.6%

0.6%

Dividend yield

None

None

None

___________________________

(1)

Represents the net cash settlement value of the warrant as of June 30, 2012, which value was calculated utilizing the Black-Scholes model specified in the warrant.

(2)

Represents the volatility assumption used to calculate the net cash settlement value as of June 30, 2012.

Stock-Based Compensation

Effective January 1, 2006, we adopted the revised accounting standards for stock-based compensation guidance which was adopted prospectively to new awards and to awards modified, repurchased, or canceled after December 31, 2005. This current guidance requires companies to measure and recognize compensation expense for all employee stock-based payments at fair value, net of estimated forfeitures, over the vesting period of the underlying stock-based awards. In addition, we account for stock-based compensation to nonemployees in accordance with the FASB accounting guidance for equity instruments that are issued to other than employees.

44

We use the Black-Scholes option-pricing model to value our stock option awards. The Black-Scholes option-pricing model requires the input of subjective assumptions, including the expected life of the stock-based payment awards and stock price volatility. Since we do not have sufficient historical volatility of our stock as a public company for the expected term of the options, we use comparable public companies as a basis for our expected volatility to calculate the fair value of option grants. We intend to continue to consistently apply this process using comparable companies until a sufficient amount of historical information regarding the volatility of our own share price becomes available. The expected term is based on the simplified method provided by SEC guidance. The risk-free interest rate is based on the U.S. Treasury yield curve with a remaining term equal to the expected life assumed at grant. The assumptions used in calculating the fair value of stock-based payment awards represent management’s best estimate and involve inherent uncertainties and the application of management’s judgment. As a result, if factors change and management uses different assumptions, stock-based compensation expense could be materially different in the future.

The estimation of the number of stock awards that will ultimately vest requires judgment, and to the extent actual results or updated estimates differ from our current estimates, such amounts will be recorded as a cumulative adjustment in the period in which estimates are revised. We consider many factors when estimating expected forfeitures, including types of awards, employee class and an analysis of our historical and known forfeitures on existing awards. Under the true-up provisions of the FASB stock based compensation guidance, we record additional expense if the actual forfeiture rate is lower than estimated, and a recovery of expense if the actual forfeiture rate is higher than estimated, during the period in which the options vest.

Prior to the completion of our initial public offering in April 2010, the fair value of our common stock underlying stock options granted during 2009 was determined by our compensation committee pursuant to authority delegated by our board of directors. The fair value of our common stock underlying stock options granted during 2010, subsequent to the completion of our IPO, was determined by the closing price of our stock on the day of grant. In the absence of a public trading market for our common stock, our compensation committee was required to estimate the fair value of our common stock at each option grant date. Our compensation committee, in making its independent determination, utilized the assistance of an independent valuation firm. In each of the separate valuations performed by our compensation committee, our compensation committee’s determination of the fair market values was consistent with the results and conclusions of our independent third party valuation. We used methodologies, approaches and assumptions consistent with the American Institute of Certified Public Accountants Practice Guide, or the AICPA Practice Guide, Valuation of Privately-Held-Company Equity Securities Issued as Compensation, considering numerous objective and subjective factors to determine common stock fair market value at each option grant date, including but not limited to the following factors:

45

·

arm’s length private transactions involving our preferred stock, including the sale of our Series A preferred stock at $23.44 per share in 2004 and 2005, the sale of our Series B preferred stock at $26.39 per share in 2006 and the sale of our Series C preferred stock at $26.39 per share in 2007 and 2008, all of which had superior rights and preferences compared to our common stock. All per share prices in this paragraph reflect the automatic conversion of all outstanding shares of preferred stock into 565,196 shares of common stock upon the completion of our initial public offering in April 2010;

·

our financial and operating performance;

·

the likelihood of achieving a liquidity event for the shares of our common stock and options, such as an initial public offering or sale of our company, given prevailing market conditions;

·

the conditions of the equity markets in general and the biotechnology markets in particular;

·

developmental milestones achieved;

·

business risks; and

·

management and board experience.

The following table represents a summary of the contemporaneous valuations performed by our compensation committee concurrently with the achievement or failure of significant milestones or with major financing events, where applicable. Listed are the related stock option grants and exercise prices that utilized these valuations from October 15, 2008 through December 31, 2009.

Date of Valuation

Milestone / Financing Event

Number

of Shares

Exercise or

Purchase

Price per

Share

Per Share

Estimated Fair

Value of

Common

Stock

October 15, 2008

$21.5 million raised in Series C preferred stock financing extension on October 15, 2008

Board approval of amended operating plan to focus on Neo-Urinary Conduit and further delay of IPO event

35,516

$

4.40

$

4.40

December 3, 2009

Board approval for the Company to pursue an IPO event

—

$

—

$

29.00

Results of Operations

Six Months Ended June 30, 2011 Compared to Six Months Ended June 30, 2012

Research and Development Expense. Research and development expense for the six months ended June 30, 2011 and 2012 was comprised of the following (in thousands):

46

Six months ended June 30,

2011

2012

Change

Compensation and related expense

$

3,582

$

2,333

$

(1,249

)

External services – direct third parties

$

1,541

$

1,332

$

(209

)

External services – other

$

146

$

386

$

240

Research materials and related expense

$

553

$

692

$

139

Facilities and related expense

$

920

$

740

$

(180

)

Total research and development expense

$

6,742

$

5,483

$

(1,259

)

Research and development expense was $6.7 million and $5.5 million for the six months ended June 30, 2011 and 2012, respectively. The decrease in research and development expense for the six months ended June 30, 2012 was primarily due to a reduction in compensation and related expenses resulting from fewer employees as compared to the six months ended June 30, 2011, as well as a reduction in external services related to direct third parties resulting from the termination of the sponsored research agreement with Wake Forest University at the end of 2011.

General and Administrative Expense. General and administrative expense for the six months ended June 30, 2011 and 2012 was comprised of the following (in thousands):

Six months ended June 30,

2011

2012

Change

Compensation and related expense

$

2,502

$

1,154

$

(1,348

)

Professional fees

$

985

$

1,263

$

278

Facilities and related expense

$

171

$

291

$

120

Insurance, travel and other expenses

$

156

$

111

$

(45

)

Total general and administrative expense

$

3,814

$

2,819

$

(995

)

General and administrative expense was $3.8 million and $2.8 million for the six months ended June 30, 2011 and 2012, respectively. The decrease in general and administrative expense for the six months ended June 30, 2012 was primarily due to a reduction in compensation and related expenses resulting from fewer employees as compared to the six months ended June 30, 2011.

Depreciation Expense. Depreciation expense was $2.1 million and $0.3 million for the six months ended June 30, 2011 and 2012, respectively. The decrease for the six months ended June 30, 2012 was primarily due to the recording during the fourth quarter of 2011 of an impairment charge, which reduced the carrying value of assets at our East Norriton, Pennsylvania facility. The decrease was also due to a change during the second quarter of 2011 in the estimated useful life of leasehold improvements associated with leased laboratory space in Winston-Salem, North Carolina upon the extension of that lease.

Other Expense. Other expense was $1.0 million and $92,000 for the six months ended June 30, 2011 and 2012, respectively. During the first quarter of 2011, we recorded a non-cash charge of $0.9 million due to the initial recognition of a lease liability. The liability resulted from a lease agreement entered into in February 2006 that became effective in March 2011 for additional warehouse space that will not be utilized over the lease term.

Interest Income (Expense). Interest income was $27,000 and $11,000 for the six months ended June 30, 2011 and 2012, respectively. The decrease was primarily due to decreased average cash balances. Interest expense was $0.5 million and $0.3 million for the six months ended June 30, 2011 and 2012, respectively. The decrease was primarily due to lower average debt facility balances outstanding in 2012.

47

Change in Fair Value of Warrant Liability. During the six months ended June 30, 2012, we recorded a non-cash credit of $0.7 million on our statements of operations due to a decrease in the fair value of the warrant liability for warrants to purchase common stock that were issued in March 2011. The decrease in fair value was primarily due to a decrease in the price per share of our common stock during the six months ended June 30, 2012. During the six months ended June 30, 2011, we recorded a non-cash credit of $9.9 million on our statements of operations due to a decrease in the fair value of the warrant liability for warrants to purchase common stock that were issued in March 2011. The decrease in fair value was primarily due to a decrease in the price per share of our common stock between the date of issuance of the warrants (March 4, 2011) and March 31, 2011, and between the date of issuance of the warrants (March 4, 2011) and June 30, 2011.

Year Ended December 31, 2010 compared to Year Ended December 31, 2011

Research and Development Expense. Research and development expense for the years ended December 31, 2010 and 2011 was comprised of the following (in thousands):

Year Ended

December 31,

Increase

(Decrease)

2010

2011

$

%

Compensation and related expense

$

7,482

$

7,085

$

(397

)

(5

) %

External services – direct third parties

$

2,007

$

3,021

$

1,014

51

%

External services – other

$

510

$

511

$

1

—

%

Research materials and related expense

$

975

$

948

$

(27

)

(3

) %

Facilities and related expense

$

1,881

$

1,728

$

(153

)

(8

) %

Total research and development expense

$

12,855

$

13,293

$

438

3

%

Research and development expense increased primarily due to higher direct third-party expenses of $0.5 million for preclinical studies related to our Neo-Kidney Augment and $0.5 million for clinical studies. Research and development expense with respect to compensation and other related costs decreased $0.4 million due to reduced headcount in our Pennsylvania facility. The decrease in headcount in our Pennsylvania facility resulted in a decrease in facility and related expenses of $0.2 million.

General and Administrative Expense. General and administrative expense for the years ended December 31, 2010 and 2011 was comprised of the following (in thousands):

Year Ended

December 31,

Increase

(Decrease)

2010

2011

$

%

Compensation and related expense

$

3,328

$

4,367

$

1,039

31

%

Professional fees

$

1,642

$

1,888

$

246

15

%

Facilities and related expense

$

349

$

315

$

(34

)

(10

) %

Insurance, travel, and other expenses

$

713

$

621

$

(92

)

(13

) %

Total general and administrative expense

$

6,032

$

7,191

$

1,159

19

%

General and administrative expense increased primarily due to the recognition of one-time termination benefits incurred during the second and fourth quarters of 2011 totaling $1.6 million in connection with severance agreements. The increase is partially offset by a reduction in compensation and related expenses resulting from fewer employees in 2011 as compared to 2010.

48

Depreciation Expense. Depreciation expense decreased by $1.8 million, or 35%, from $4.9 million in 2010 to $3.1 million in 2011 due primarily to an impairment charge recorded in the fourth quarter of 2011, which reduce the carrying value of assets at our Pennsylvania facility. The decrease is also due to a change in the estimated useful life of leasehold improvements associated with leased laboratory space in Winston-Salem, North Carolina upon the extension of that lease. In May 2011, the Company exercised the first five-year renewal option under its lease for the laboratory space. The amended lease extended the lease term to October 2016.

Impairment of Property and Equipment. During the year ended December 31, 2011, we recorded a non-cash property and equipment impairment charge of $7.4 million in connection with the restructuring plan announced in November 2011. Under the restructuring plan, we eliminated plans to use our facility in East Norriton, Pennsylvania as a manufacturing center and centralized our research and development operations in our leased facility in Winston-Salem, North Carolina.

Other Expense. Other expense was $1.7 million in 2011. During the first and fourth quarters of 2011, we recorded non-cash charges totaling $1.6 million in connection with the lease liabilities. The first quarter charge of $0.9 million resulted from a lease that became effective in March 2011 for additional warehouse space that will not be utilized over the lease term. The fourth quarter charge of $0.9 million resulted from a restructuring that changed our operating plan, such that office and manufacturing space will not be utilized for our original planned use during the remaining years of the current lease term.

Interest Income (Expense). Interest income was $62,000 and $53,000 for 2010 and 2011, respectively. The decrease was primarily due to decreased average cash balances. Interest expense was $2.1 million and $0.8 million for 2010 and 2011, respectively. The decrease was primarily due to lower average debt facility balances outstanding in 2011.

Change in Fair Value of Warrant Liability. During 2011, we recorded a non-cash credit of $14.6 million on our statement of operations due to a decrease in the fair value of the warrant liability for warrants to purchase common stock that were issued in March 2011. This decrease in fair value was primarily due to a decrease in the price per share of our common stock on the reporting date. During 2010, we recorded a non-cash credit of $0.2 million on our statement of operations due to a decrease in the fair value of the warrant liability for warrants to purchase preferred stock that were liability-classified at that time. The preferred stock warrants were reclassified from liability to stockholders’ equity upon the completion of our initial public offering in April 2010.

49

Year Ended December 31, 2009 compared to Year Ended December 31, 2010

Research and Development Expense. Research and development expense for the years ended December 31, 2009 and 2010 was comprised of the following (in thousands):

Year Ended

December 31,

Increase

(Decrease)

2009

2010

$

%

Compensation and related expense

$

9,134

$

7,482

$

(1,652

)

(18

) %

External services – direct third parties

$

3,753

$

2,007

$

(1,746

)

(47

) %

External services – other

$

1,048

$

510

$

(538

)

(51

) %

Research materials and related expense

$

1,771

$

975

$

(796

)

(45

) %

Facilities and related expense

$

2,242

$

1,881

$

(361

)

(16

) %

Total research and development expense

$

17,948

$

12,855

$

(5,093

)

(28

) %

Research and development expense decreased primarily due to lower direct third-party expenses of $0.8 million for preclinical studies and $0.2 million for clinical studies, as well as the receipt of Qualifying Therapeutic Discovery Project Grants totaling $0.7 million, which was recorded as a credit to external services-direct third parties. Research and development expense with respect to compensation and other related costs decreased $1.7 million due to a full year with reduced headcount in our Pennsylvania facility. The decrease in external services activity and headcount resulted in a decrease of $1.7 million in the demand for lab supplies and other services related to our product candidates.

General and Administrative Expense. General and administrative expense for the years ended December 31, 2009 and 2010 was comprised of the following (in thousands):

Year Ended

December 31,

Increase

(Decrease)

2009

2010

$

%

Compensation and related expense

$

3,324

$

3,328

$

4

—

%

Professional fees

$

1,093

$

1,642

$

454

42

%

Facilities and related expense

$

481

$

349

$

(132

)

(28

) %

Insurance, travel, and other expenses

$

629

$

713

$

179

28

%

Total general and administrative expense

$

5,527

$

6,032

$

505

9

%

General and administrative expense increased primarily due to increased outside professional services, including legal expenses associated with operating as a public company.

Depreciation Expense. Depreciation expense remained relatively unchanged for the year ended 2009 compared to the year ended 2010, as additions were not significant in either period.

Interest Income (Expense). Interest income decreased $0.1 million, or 71%, from $0.2 million in 2009 to $0.1 million in 2010 due to lower investment balances and lower rates and returns on our investments. Interest expense decreased $1.4 million, or 39%, from the year ended 2009 to the year ended 2010, due to lower average debt balances and the end of our interest-only payments in the third quarter of 2009.

Change in Fair Value of Warrant Liability. Change in fair value of warrant liability increased due to a non-cash credit of $1.6 million related to the preferred stock warrants in the year ended 2009, as the estimated fair value of the Company’s preferred stock warrants decreased during that period. The preferred stock warrants were reclassified from a liability to stockholders equity upon the completion of our initial public offering in April 2010.

50

Recent Developments

Neo-Urinary Conduit Phase I Trial

In October 2012, we announced the death of two patients enrolled on our Neo-Urinary Conduit Phase I clinical trial. Both patients died due to afflictions unrelated to the Neo-Urinary Conduit or the surgical procedure. One patient died of metastatic bladder cancer and the other died of cardiopulmonary arrest following a myocardial infarction, or heart attack. Each of these patients’ Neo-Urinary Conduits was properly functioning at the time of their death. We notified the Data Safety Monitoring Board of these events and the Phase I clinical trial is ongoing. We continue to focus on enrolling the remaining four patients in our Phase I trial at our six clinical sites by the end of 2012.

2012 Financing

On October 2, 2012, we conducted the 2012 Financing, in which we issued Convertible Notes and the 2012 Warrants and raised approximately $15 million in gross proceeds. Each of the holders of the Demand Notes, described below, exchanged their Demand Notes for the securities issued in the 2012 Financing. For additional information on the 2012 Financing, see page 7 of this prospectus titled “2012 Financing.”

We have deposited $1 million of the gross proceeds of the 2012 Financing into an escrow account pursuant to an escrow agreement between the Company, the holders of the Convertible Notes, and Ballard Spahr LLP, as escrow agent. Upon the achievement of (1) the successful completion of patient implants in the Phase I clinical trial of the Company’s Neo-Urinary Conduit and (2) analysis of in-life data from the Company’s GLP studies for the Neo-Kidney Augment that demonstrates that continued development is warranted (the “Milestones”), the holders will instruct the escrow agent to release the escrowed funds to the Company. If the Milestones are not achieved by March 1, 2013,at the direction of the holders of at least 40% of the aggregate principal amount of the Convertible Notes, including certain specified holders, the escrow agent will transfer to the Company the portion of the escrowed amount that the holders agree is necessary for the orderly disposition of the Company’s assets.

Venture Debt Amendments

In connection with the 2012 Financing, on October 2, 2012, the Company, Horizon and Horizon Technology Finance Corporation entered into a First Amendment of Venture Loan and Security Agreement (the “Loan Amendment”). The Loan Amendment amends the Venture Loan and Security Agreement dated as of March 14, 2011 pursuant to which Horizon made a loan of $5 million to us (the “Horizon Loan”). The Loan Amendment provides that, effective September 1, 2012, the maturity date for the Horizon Loan is extended from January 1, 2014 until May 1, 2014. We are now required to make monthly interest payments of $39,654.12 through June 1, 2013 and monthly interest and principal payments of $354,779.67 from July 1, 2013 through and including May 1, 2014. Horizon’s security now includes a lien on our intellectual property assets. Effective September 1, 2012, the interest rate on the Horizon Loan was increased from 11.75% to 13.0% per annum.

51

Right of First Negotiation

On October 2, 2012, we entered into the Right of First Negotiation Agreement (the “ROFN Agreement”) with Celgene, one of the selling stockholders, pursuant to which we granted Celgene a right of first negotiation to the license, sale, assignment, transfer or other disposition by us of any material portion of intellectual property (including patents and trade secrets) or other assets related to our Neo-Urinary Conduit program. The ROFN Agreement provides for Celgene to receive 2012 Warrants to purchase 50% fewer of the shares that otherwise would have been issued to Celgene in the 2012 Financing. In the event of a change in control of the Company, the ROFN Agreement and all of Celgene’s rights pursuant thereto will automatically terminate in all respects and be of no further force and effect.

Bridge Financing

On September 7, 2012, we issued Demand Notes in the aggregate amount of $1 million to certain new and existing investors in the Bridge Financing. In connection with the transaction, holders of the Demand Notes had the option to exchange the principal balance and accrued interest of their Demand Notes with debt securities and warrants issued by the Company in any subsequent offering.

Liquidity and Capital Resources

Sources of Liquidity

We have incurred losses since our incorporation in 2003 as a result of our significant research and development expenditures and the lack of any approved products to generate product sales. We have a deficit accumulated during the development stage of $238.5 million as of June 30, 2012. We anticipate that we will continue to incur additional losses until such time that we can generate significant sales of our product candidates currently in development or we enter into cash flow positive business transactions. We have funded our operations principally with proceeds from equity offerings and long-term debt. The following table summarizes our equity funding sources as of June 30, 2012:

Issue

Year

Number of

Shares

Net Proceeds

(in thousands)(2)

Series A Redeemable Convertible Preferred Stock

2004, 2005

166,832

(1

)

$

38,910

Series B Redeemable Convertible Preferred Stock

2006

190,601

(1

)

$

50,040

Series C Redeemable Convertible Preferred Stock

2007, 2008

207,764

(1

)

$

54,571

Initial Public Offering

2010

600,000

$

25,721

Private Placement

2011

1,107,939

$

28,941

2,273,136

$

198,183

________________________________

(1)

Number of shares represents the number of shares of common stock into which each series of preferred stock converted at the time of our initial public offering.

In March 2011, we closed a private placement transaction pursuant to which we sold securities consisting of 1,107,939 shares of common stock and warrants to purchase 1,046,102 shares of common stock. The purchase price per security was $28.30. The warrants have a term of five years and are immediately exercisable. We received net proceeds of approximately $28.9 million.

We have also funded our operations through the use of proceeds received from our long-term debt totaling $39.5 million through June 30, 2012, net of issuance costs. We currently have a working capital note with an outstanding principal of $4.1 million as of June 30, 2012, which borrowings were used for our general working capital needs.

52

The lease agreement for our facility in East Norriton, Pennsylvania requires us to provide security and restoration deposits totaling $2.2 million to the landlord. We have deposited $1.0 million with the landlord as a security deposit, which amount was recorded as a non-current other asset on our balance sheet as of June 30, 2012. As of December 31, 2011 and June 30, 2012, an outstanding letter of credit is satisfying the remaining restoration deposit obligation of $1.2 million. At the end of the lease term, the landlord has the right to require us to utilize the funds collateralizing this letter of credit to restore the facility to its original condition. The letter of credit is collateralized by an account held at the bank. Recently the bank informed us that it will not review the letter of credit beyond December 2, 2012. Therefore, we will need to seek a new letter of credit or deposit cash of up to $1.2 million in an account held by the landlord to satisfy our deposit obligation.

Cash, cash equivalents and short-term investments at December 31, 2011 were $15.3 million, representing 86% of total assets. Cash, cash equivalents and short-term investments at June 30, 2012, were $3.7 million, representing 60.8% of total assets.

Based upon our current expected level of operating expenditures and debt repayment, and assuming we are not required to settle any outstanding warrants in cash or redeem, or pay cash interest on, any of our Convertible Notes, we expect to be able to fund operations through May 2013. This period could be shortened if there are any significant increases in planned spending on development programs than anticipated or other unforeseen events. We will need to raise additional funds through collaborative arrangements, public or private sales of debt or equity securities, commercial loan facilities, or some combination thereof. There is no assurance that other financing will be available when needed to allow us to continue our operations or if available, on terms acceptable to us.

Equity and Debt Financings

On October 2, 2012, we conducted the 2012 Financing of the Convertible Notes and the 2012 Warrants, in which we raised approximately $15 million in gross proceeds. The Convertible Notes bear interest at 10% per annum, which is payable quarterly. The Convertible Notes are convertible into shares of common stock at a current conversion price of $0.75 per share. We may, at our option, pay interest by the issuance of freely tradable shares of common stock.

The 2012 Warrants are exercisable at an exercise price of $0.75 per share. The 2012 Warrants include (i) five-year warrants to purchase up to 16,672,145 shares of common stock, (ii) ten-year warrants to purchase up to 33,344,293 shares of common stock and (iii) two-year warrants, issued only to holders of the Demand Notes, to purchase up to 1,118,722 shares of common stock.

In addition, we issued Horizon, ten-year warrants to purchase 1,138,785 shares of common stock and five-year warrants to purchase 569,392 shares of common stock in connection with the Loan Amendment.

In March 2011, we closed a private placement transaction pursuant to which we sold securities consisting of 1,107,939 shares of common stock and warrants to purchase 1,046,102 shares of common stock. The purchase price per security was $28.30. The warrants have a term of five years. We received net proceeds of approximately $28.9 million.

In April 2010, we completed an initial public offering, selling 600,000 shares of common stock at an initial public offering price of $50.00 per share resulting in gross proceeds of $30.0 million. Net proceeds received after underwriting fees and offering expenses were approximately $25.7 million.

53

Cash Flows

The following table summarizes our cash flows from operating, investing and financing activities for the six months ended June 30, 2011 and 2012 (in thousands):

Six Months Ended June 30,

2011

2012

Change

Statement of Cash Flows Data:

Total cash provided by (used in):

Operating activities

$

(12,640

)

$

(10,549

)

$

2,091

Investing activities

$

(6,163

)

$

6,062

$

12,225

Financing activities

$

25,975

$

(1,068

)

$

(27,043

)

Decrease in cash and cash equivalents

$

7,172

$

(5,555

)

$

(12,727

)

The following table summarizes our cash flows from operating, investing and financing activities for each of the past three years ended (in thousands):

Year Ended December 31,

2009

2010

2011

Statement of Cash Flows Data:

Total cash provided by (used in):

Operating activities

$

(26,021

)

$

(19,412

)

$

(21,888

)

Investing activities

$

1,876

$

2,347

$

(6,147

)

Financing activities

$

(4,995

)

$

12,232

$

25,307

Decrease in cash and cash equivalents

$

(29,140

)

$

(4,833

)

$

(2,728

)

Operating Activities

Cash used in operating activities decreased $2.1 million for the six months ended June 30, 2012, compared to the six months ended June 30, 2011, due to the payment of $1.0 million security deposit in the first quarter of 2011 in connection with the lease for our East Norriton, Pennsylvania facility and a reduction in compensation and related expenses resulting from fewer employees as compared to the six months ended June 30, 2011.

Cash used in operating activities increased $2.5 million for the year ended December 31, 2011, compared to the year ended December 31, 2010, primarily due to the payment of a $1.0 million security deposit in connection with the lease for our corporate headquarters and a decrease in our accrued expenses of $1.5 million.

Cash used in operating activities decreased $6.6 million for the year ended December 31, 2010, compared to the year ended December 31, 2009, primarily due to a decrease in our net loss. Specifically, the decrease in our net loss relates primarily to a decrease in research and development expense of $5.0 million associated with our preclinical and clinical studies, and a decrease in cash interest expense of $1.3 million due to lower average debt balances and the end of interest-only payments in 2009.

54

Investing Activities

Cash provided by investing activities increased $12.2 million for the six months ended June 30, 2012, compared to the six months ended June 30, 2011, primarily due to an increase in net sales and redemptions (net of purchases) of short-term investments of $12.2 million.

Cash used in investing activities increased $8.5 million for the year ended December 31, 2011, compared to the year ended December 31, 2010, primarily due to a decrease in net sales and redemptions (net of purchases) of short-term investments of $8.6 million, which was offset in part by a decrease of $0.1 million in cash paid for property and equipment.

Cash provided by investing activities increased $0.5 million for the year ended December 31, 2010, compared to the year ended December 31, 2009, primarily due to an increase in sales and redemptions (net of purchases) of short-term investments of $0.4 million and a decrease of $0.1 million in cash paid for property and equipment.

Financing Activities

Cash provided by financing activities decreased $27.0 million for the six months ended June 30, 2012, compared to the six months ended June 30, 2011. The 2011 period included net proceeds of $29.0 million received from our March 2011 equity financing.

Cash provided by financing activities increased $13.1 million for the year ended December 31, 2011, compared to the year ended December 31, 2010, primarily due to a decrease in payments of long-term debt of $4.9 million primarily resulting from the March 2011 refinancing of our working capital facility, and an increase of $4.9 million in proceeds from long-term debt due to new borrowings under our working capital facility in March 2011. In addition, the 2011 period included net proceeds received from our March 2011 equity financing of $29.0 million as compared to $25.7 million received in the 2010 period consisting of net proceeds received from our initial public offering in April 2010.

Cash provided by financing activities increased $17.2 million for the year ended December 31, 2010, compared to the year ended December 31, 2009, due to net proceeds received from our initial public offering of $25.7 million, offset by an increase in payments of long-term debt of $7.6 million primarily resulting from the end of interest-only payments on our long-term debt in 2009, and a decrease of $0.8 million in proceeds from long-term debt.

Potential Future Milestone Payments

In 2003, we executed a license agreement with Children’s Medical Center Corporation (“CMCC”), whereby CMCC granted to us the utilization of certain patent rights. We are obligated to make payments to CMCC upon the occurrence of various clinical milestones. During the fourth quarter of 2006, we achieved two of our clinical milestones for the first licensed product launched, as defined in the agreement, and paid $350,000, which was recorded as research and development expense for the year ended December 31, 2006. No further milestones payments have been made since 2006. Upon the successful completion of certain milestones, we will be obligated, under our current agreement, to make future milestone payments for the first licensed product. As of December 31, 2010, we had no payment obligations to CMCC under this agreement. In addition, upon commercialization of the licensed product, we will pay CMCC royalties based on net sales of products covered by the license by us, our affiliates and our sublicensees in all countries, except for those for which there is no valid patent claim, until the later of the expiration, on a country-by-country basis, of the last patent right and October 2018.

55

Off-Balance Sheet Arrangements

We do not have any off-balance sheet arrangements or relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured finance or special purpose entities.

Contractual Obligations

The following table summarizes our contractual obligations as of December 31, 2011 (in thousands):

Payments due by period

Contractual Obligations (1)(2)

Total

2012

2013 and

2014

2015 and

2016

2017 and

thereafter

Debt obligations

$

5,127

$

2,274

$

2,853

$

—

$

—

Interest payments on debt

$

687

$

488

$

199

$

—

$

—

Operating lease obligations

$

4,387

$

992

$

2,055

$

1,340

$

—

Other

—

—

—

—

—

Total

$

10,201

$

3,754

$

5,107

$

1,340

$

—

____________________________

(1)

This table does not include any milestone payments which may become payable to third parties under license agreements, including milestones that may be payable to CMCC, as the timing and likelihood of such payments are not known. We will be required to pay CMCC development milestones aggregating approximately $6.9 million, which includes $350,000 we have paid to date, if we develop and obtain regulatory approval of a licensed product in each of the four subfields covered by our license agreement. Also, if cumulative net sales of all licensed products reach a certain level, we will be required to make a one-time sales milestone payment of $2.0 million. A portion of milestone payments we make will be credited against our future royalty payments.

(2)

This table does not include any license maintenance fees which may become payable to Wake Forest University Health Sciences (WFUHS), as the timing and likelihood of such payments are not known. We will be required to pay certain license maintenance fees with respect to each product covered by new development patents under our license with WFUHS, commencing two years after we initiate the first animal study conducted under cGLP, with respect to such product. These license maintenance fees, which are in the low six figure range with respect to each product, will be creditable against royalties we are obligated to pay to WFUHS for such product.

Working Capital Note

In March 2011, we refinanced the outstanding debt owed to one of our lenders. Pursuant to the terms of the refinancing, we simultaneously borrowed $5.0 million from the lender and repaid the then outstanding principal amount of $4.5 million. As of December 31, 2011, the outstanding balance of this loan was $5.0 million. We were obligated to make interest-only payments through January 2012, followed by 24 monthly payments of principal and interest at an interest rate of 11.75% per annum. In October 2008, we refinanced the terms of the working capital note with a then principal amount of $20 million, which was previously refinanced in 2006 and 2007. Under the 2008 refinancing, the repayment terms of $14.2 million principal amount of the working capital note were extended to add an additional six-month period of interest-only payments through July 2009 followed by 24 monthly payments of principal and accrued interest at an annual interest rate of 12.26%. The repayment of $5.8 million of the working capital note were extended to add a 14-month period of interest-only payments through January 2010 followed by 20 monthly payments of principal and accrued interest at an annual interest rate of 12.26%.

56

In connection with the 2012 Financing, in October 2012, we amended the terms of the working capital note. Effective September 1, 2012, the maturity date for the working capital note is extended from January 1, 2014 until May 1, 2014. We are now required to make monthly interest payments of $39,654.12 through June 1, 2013 and monthly interest and principal payments of $354,779.67 from July 1, 2013 through and including May 1, 2014. Effective September 1, 2012, the interest rate on the Horizon Loan was increased from 11.75% to 13.0% per annum.

Borrowings under the working capital note are secured by all of our assets, except for permitted liens that have priority, including liens on certain equipment acquired to secure the purchase price or lease obligation, as defined in the loan agreement. In October 2012, the security was extended to include a lien on our intellectual property.

Equipment and Supplemental Working Capital Note

We had an additional loan with another lender to fund equipment and other asset purchases. This loan was repaid during 2012. The original amount borrowed of $9.8 million consisted of a $7.4 million note to purchase equipment, or the equipment note, and a $2.4 million note for other soft costs, or supplemental working capital note, for purchases from July 2005 through December 2009. In October 2007, we refinanced the equipment and supplemental working capital notes with a then carrying amount of $4.6 million. Under the terms of the refinanced equipment and supplemental working capital notes, we had a 12-month period of interest-only payments through October 2008 followed by 24 monthly payments of principal and accrued interest at an annual interest rate of 10.44%. During 2008, we executed an additional loan in the amount of $1.1 million on the equipment and supplemental working capital notes. During 2009, we executed an additional loan in the amount of $0.5 million on the equipment and supplemental working capital notes. The equipment note bore interest at an average rate of 11.69% and matured over 36 to 48 months. The supplemental working capital note bore interest at an average rate of 11.67% and matured over 36 months. The equipment note and the supplemental working capital note were secured by a first priority lien on equipment and assets purchased with the proceeds from the notes.

Machinery and Equipment Loan

In December 2007, we executed a $1.65 million agreement with the Commonwealth of Pennsylvania to fund machinery and equipment and other asset purchases through December 31, 2009. On December 31, 2007 we borrowed $1.3 million under the loan to fund equipment purchases. In March 2009, we borrowed an additional $0.3 million under the loan to fund equipment purchases. Under the terms of the loan, we had a four year period of payments of principal and accrued interest at an annual interest rate of 5% until September 2011 and 5.25% from September 2011 through maturity of the loan. The loan was secured by a first priority lien on equipment and assets purchased with the proceeds from the loan. As of December 31, 2011, this loan was paid in full.

57

Operating Leases

In 2006, we entered into a ten-year, non-cancelable lease agreement for space for our corporate offices and full-scale manufacturing facility located in East Norriton, Pennsylvania. Under the lease agreement, we began leasing additional space in the same building in March 2011. We are currently subleasing this additional warehouse space to a third party. The lease will expire by its terms in February 2016. Effective March 2011, the lease agreement for our corporate headquarters required us to provide security and restoration deposits totaling $2.2 million to the landlord, an increase from the prior amount of $1.7 million. Until January 2011, we obtained letters of credit from a bank in favor of the landlord to satisfy the obligation of $1.7 million. In January 2011, we deposited $1.0 million with the landlord. As of March 2011, an outstanding letter of credit is satisfying the remaining obligation of $1.2 million. Recently the bank informed us that it will not review the letter of credit beyond December 2, 2012. Therefore, we will need to seek a new letter of credit or deposit cash of up to $1.2 million in an account held by the landlord to satisfy our deposit obligation.

In June 2005, we entered into a six-year, non-cancelable lease agreement for laboratory space for our research and development projects in Winston-Salem, North Carolina. The lease agreement includes the right to lease additional contiguous space, which we executed in February 2007. The initial term for the lease for this facility expired in September 2011. In May 2011, we exercised the first five-year renewal option under the lease. The amended lease extends the lease term to October 2016 and provides for payments of average annual base rent of approximately $0.2 million commencing in October 2011.

Other Contractual Obligations

In January 2006, we entered into a research agreement with WFUHS, which was amended in September 2006 and extended in September 2010 for an additional three-year period. Under the research agreement, WFUHS agreed to perform sponsored research in return for quarterly payments. Under the extended agreement, we made payments of $800,000 for 2011 research activities of WFUHS. We terminated the research agreement with WFUHS effective as of December 31, 2011.

We have entered into agreements with consultants and clinical research organizations which are partially responsible for conducting and monitoring our clinical trials for our product candidates. We have also entered into agreements with consultants and clinical research organizations that are responsible for work in our preclinical studies, public relations and other areas in the ordinary course of our business. These contractual obligations have been excluded from the contractual obligations table elsewhere in this section, because we may terminate these at any time without penalty.

Quantitative and Qualitative Disclosures About Market Risk

The primary objective of our investment activities is to preserve our capital to fund operations. We also seek to maximize income from our investments without assuming significant risk. To achieve our objectives, we maintain a portfolio of cash equivalents and investments in a variety of securities of high credit quality. Due to the nature of these investments, we believe that we are not subject to any material market risk exposure. As of June 30, 2012, we held cash, cash equivalents and short-term investments of $3.7 million.

58

BUSINESS

Overview

Tengion is a regenerative medicine company focused on discovering, developing, manufacturing and commercializing a range of neo-organs, or products composed of living cells, with or without synthetic or natural materials, implanted or injected into the body to engraft into, regenerate, or replace a damaged tissue or organ. Using our Organ Regeneration Platform, we create these neo-organs using a patient’s own cells, or autologous cells. We believe our proprietary product candidates harness the intrinsic regenerative pathways of the body to regenerate a range of native-like organs and tissues. Our product candidates are intended to delay or eliminate the need for chronic disease therapies, organ transplantation, and the administration of anti-rejection medications. In addition, our neo-organs are designed to avoid the need to substitute other tissues of the body for a purpose to which they are poorly suited.

Building on our clinical and preclinical experience, we are initially leveraging our Organ Regeneration Platform to develop our Neo-Urinary Conduit for bladder cancer patients who are in need of a urinary diversion and our Neo-Kidney Augment for patients with advanced chronic kidney disease.

Our Neo-Urinary Conduit is intended to replace the use of bowel tissue in bladder cancer patients requiring a non-continent urinary diversion after bladder removal surgery, or cystectomy. We are able to manufacture our Neo-Urinary Conduit using a proprietary process that takes four weeks or less and uses smooth muscle cells derived from a routine biopsy. We are currently conducting a Phase I clinical trial for our Neo-Urinary Conduit in bladder cancer patients to assess its safety and preliminary efficacy, as well as to translate the surgical implantation procedure utilized in preclinical studies. This trial is an open-label, single-arm study, which is currently expected to enroll up to ten patients. We enrolled our sixth patient in this trial in the third quarter of 2012. In October 2012, we announced the death of two patients enrolled in our Neo-Urinary Conduit Phase I clinical trial. One patient died of metastatic bladder cancer and the other died of cardiopulmonary arrest following a myocardial infarction, or heart attack. Each of these patients’ Neo-Urinary Conduits was properly functioning at the time of their death. Both patients died due to afflictions unrelated to the Neo-Urinary Conduit or the surgical procedure. We notified the Data Safety Monitoring Board of these events and the Phase I clinical trial is ongoing. We continue to focus on enrolling the remaining four patients in our Phase I trial at our six clinical sites by the end of 2012. While we and our clinical investigators believe that the surgical technique used successfully in animal models has been translated to humans, we are continuing to seek to refine the appropriate post-surgical care of these patients. Assuming appropriate safety data, we anticipate that we will complete implantation of up to ten patients by the end of 2012.

Our Neo-Kidney Augment is being developed to prevent or delay dialysis by increasing renal function in patients with advanced chronic kidney disease. Our Neo-Kidney Augment is based on our proprietary technology, which is expected to use the patient’s cells, procured by a needle biopsy of the patient’s kidney, to create an injectable product candidate that can catalyze the regeneration of functional kidney tissue. We recently completed a successful Pre-IND meeting with the U.S. Food and Drug Administration (FDA) for the Neo-Kidney Augment. We and the FDA have agreed on a good laboratory practice (GLP) animal study program required to support an Investigational New Drug (IND) filing and initiation of a Phase I clinical trial in chronic kidney disease (CKD) patients. We anticipate we will submit an IND filing for the product candidate during the first half of 2013 and that our Phase I trial will provide initial human proof-of-concept data in 2014. We also continue to explore moving our Neo-Kidney Augment forward in Europe using the Advanced Therapy Medicinal Products, or ATMP, pathway, an established European regulatory route for advanced cell based therapies. We have obtained scientific advice from a European competent authority (Swedish Medicinal Products Agency) and intend to aggressively pursue our Neo-Kidney Augment development program.

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To date, we have devoted substantially all of our resources to the development of our Organ Regeneration Platform and product candidates, as well as to our facilities that we employ to manufacture our neo-organs. Since our inception in July 2003, we have had no revenue from product sales, and have funded our operations principally through the private and public sales of equity securities and debt financings. We have never been profitable and, as of June 30, 2012, we had an accumulated deficit of $238.5 million. We expect to continue to incur significant operating losses for the foreseeable future as we advance our product candidates from discovery through preclinical studies and clinical trials and seek marketing approval and eventual commercialization.

We were incorporated in Delaware in 2003. Our corporate headquarters are located at 3929 Westpoint Boulevard, Suite G, Winston-Salem, North Carolina and our telephone number is (336) 722-5855.

Our Organ Regeneration Platform

Our Organ Regeneration Platform involves testing different combinations of cell types and biomaterials. We believe this approach enables us to identify accurately the mixture of various cell types and biomaterials for a specific organ necessary to elicit a regenerative response. We own or license 19 U.S. patents and patent applications and over 100 international patents and filings related to our Organ Regeneration Platform and product candidates. The organ regeneration process enabled by our proprietary Organ Regeneration Platform involves the following steps:

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Isolation and expansion of progenitor cells. Our autologous organ regeneration process begins with receipt of a small tissue sample, obtained by a biopsy from the patient. This sample is then sent to our clinical production facility in North Carolina where our scientists engage in a specialized process to isolate the necessary committed progenitor cells that form the basis of the target organ’s or tissue’s essential function. Committed progenitor cells have been programmed by the body to become specific cell types, but are not yet developed into a single cell type, retaining the ability to promote regeneration. We then use our proprietary cell growth process to grow, or expand, the specifically isolated progenitor cells ex vivo, or outside of the body, until an adequate number of cells are produced.

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Seeding and growth. Once we have completed our cell expansion process, we combine those cells with a biomaterial to stabilize and form our product candidate. Depending upon the type of neo-organ being created, we use biomaterials that, when combined with the isolated and expanded cell populations, promote the desired regenerative outcome. We select the type of material based upon our knowledge of the organ or tissue we are seeking to regenerate and extensive testing to determine the optimal material characteristics, treatment, and shape that will encourage cell growth and catalyze the body’s regenerative power. Composition and design of the biomaterials are essential elements of our technology that help to ensure native-like tissue regeneration. The expanded cell populations and selected biomaterial are formulated, using our proprietary bioprocesses, packaged, and then shipped to the patient’s surgeon ready for implantation.

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Implantation. The neo-organ is typically shipped from our manufacturing facility to the patient’s surgeon within four weeks after we receive the patient’s biopsy. Both before and during the initial clinical trial for our product candidates, we collaborate with a small number of surgeons to translate the surgical procedure used in preclinical studies for use in humans.

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Regeneration. Based on data from preclinical and clinical studies, we believe that our neo-organs serve as a catalyst for the body to regenerate native-like organs and tissues. Native tissue supporting structure, for example blood vessels, grow into the implanted neo-organ and the biomaterial is absorbed by the body. In preclinical tests, we have observed that the newly grown tissue integrates with its surroundings and becomes substantially indistinguishable over time from the native tissue. We have also observed that, in this regenerative process, the body regulates the growth and development of the organ to ensure that it is not under- or over-developed. Similarly, the neo-organ takes on native-like functional activities.

Our Strategy

Our goal is to become the leading regenerative medicine company focused on the development and commercialization of neo-organs for a variety of diseases and disorders. To achieve this objective, we intend to:

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Advance the Neo-Urinary Conduit. We have an active IND for our Neo-Urinary Conduit and are currently conducting a Phase I clinical trial in bladder cancer patients who require removal of their bladders and are in need of a urinary diversion. We enrolled our sixth patient in this trial in the third quarter of 2012. Assuming appropriate safety data, we anticipate that we will complete implantation of up to ten patients by the end of 2012.

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Advance the Neo-Kidney Augment. We are devoting a significant portion of our resources and business efforts to our Neo-Kidney Augment development program. We recently completed a successful Pre-IND meeting with the FDA for the Neo-Kidney Augment. We and the FDA have agreed on a GLP animal study program required to support an IND filing and initiation of a Phase I clinical trial in CKD patients. We anticipate we will submit an IND filing for the product candidate during the first half of 2013 and that our Phase I trial will provide initial human proof-of-concept data in 2014. We also continue to explore moving our Neo-Kidney Augment forward in Europe using the ATMP pathway.

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Leverage our Organ Regeneration Platform to develop additional neo-organs. We believe our technology is broadly applicable to other indications including certain types of urologic, renal, gastrointestinal and vascular diseases. We have generated significant proprietary know-how and intellectual property in the development and manufacture of our various product candidates. We plan to continue to apply our technologies to other neo-organs as treatments for other conditions.

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Selectively pursue strategic partnerships to accelerate and maximize the potential of our product candidates and technology while preserving significant commercial rights. We intend to selectively pursue strategic partnership opportunities that we believe may allow us to accelerate the development or commercialize our products to maximize the value of our product candidates.